First of all, what are points? Borrowers pay points to a bank when a loan is settled. each point represents a percentage point of the entire loan value. If your mortgage is in the amount of $100,000, one point would cost you $1,000.
Lenders take these upfront payments to reduce the long term cost of the loan. The ratios can be different, depending on the market and the bank, but here is an example for a mortgage at 6.25%: if you pay one and one half points, you will reduce the home loan rate to 5.875%, if you pay 2 ? points, you would reduce the rate to 5.375%.
The main issue for whether or not you should pay points is how long you think you will have the mortgage, since paying the upfront cost, and moving out 2 months later doesn?t make sense. Borrowing to pay points makes no sense, since the concept is to save interest, not pay it. First time home buyers frequently will not find it any benefit to pay points, since many do not stay in their first home for long.
Points can be viewed asan investment in the mortgage. Let?s say you?re thinking about paying 1.5 points to get a reduction in your home loan rate from 6.00% to 5.50%. You are paying a part of your interest in advance, in effect.
There are many sites on the internet that can help you calculate how much you can save in monthly mortgage payments by paying upfront points, based on the length of the loan or you can take the easy way out and contact a mortgage professional to do it for you.
Let us go back to our $100,000 loan that may be reduced to 5.5% if $1,500 were put down in points. So what you have is an investment of $1,500 and the real issue is how well this investment perform. The monthly mortgage for a 15 year 5.5% loan is 599.55 a month. For a 30 year maturity, it will be $567.79.
This is a clear savings of $31.76 per month, but remember you had to pay $1,500 to receive this savings. Simply divide $1,500 by $31.76 and you will realize that it will take 47.23 months for the points to be fully amortized. You have to count on living in your home for a minimum of 3 years, 11 months, for the points to be worthwhile.
Once you have amortized that initial $1,500 investment, however, you then have a clear savings of $31.76 per month. Let us now suppose (this doesn?t happen very often today) that you actually stayed in your home for the thirty years; you would save that $31.76 over the course of 30 years, a big savings of $9,933.58!
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