One of the most important questions borrowers ask when refinancing or buying a home is: Should I pay points toward my mortgage?
A point is 1% of the loan amount. There are origination points that are broken up into discount points, or just origination points. What a loan applicant must be aware of is the difference. One applies to the total mortgage amount and will lower the monthly payment. The other goes into the pocket of your mortgage broker.
“Points” paid on a mortgage represent a percentage of the loan amount being borrowed and are used to “buy down” the interest rate. The idea is to pay extra fees upfront to lower the interest being charged over the life of the loan. For example, paying 2 “points” on a $100,000 mortgage amount would add $2,000 to the closing costs. As a general average, each “point” paid by the buyer lowers their interest rate by only .25% or less. Here’s how the savings would add up: If at “par” (0 points), the interest rate offered is 4%, the monthly payment on a 30 year mortgage would be $477.42. If paying 2 “points” ($2,000) lowers the rate to 3.5%, the monthly payment would drop to $449.05, a savings of $28.38 each month, or $10,215 over 30 years (360 months).
Why doesn’t everyone do this? Good question! There are a few reasons. First, after using funds for the down-payment and paying closing costs, their attorney, inspection fees, tax escrows, etc., most buyers would rather not add any extra costs. Secondly, buyers have to figure on the “present value” of money vs. the “future value” of those funds. Some would rather save that $2,000 cost and instead, invest the money in a mutual fund that would most likely earn more over the next 30 years than they’d save by paying the points.
Next reason, statistically, borrowers need to consider how longthey are planning to live in the house they are buying. If they are not going to live in the house for 30 years, they wouldn’t end up receiving the full $10k in savings. As an average, many buyers will only be in their home for 7 years before moving, in which case, the monthly savings would total under $2,400. Therefore, they would be parting with $2,000 for 7 years in order to save $400. It wouldn’t be the best way to spend your hard earned money.
The only time that most would consider paying points is when the price/value benefits the buyer, such as if a lender was charging 1/8 (.125%) points to lower the rate by .125%. In that case, the $125 in points would be earned back through a lower $470.24 monthly payment in under 18 months; not a bad trade-off, especially if the longer the buyer planned on staying in the home. As always, it’s best to consider all your financing options with an experienced loan officer, so call your Contour Mortgage professional today in order to make your best home buying decisions.
