When you obtain out a mortgage, you will hear discussions about points. There are two types: origination fees (the cost to obtain the loan) are calculated in points, but points may also be required to reduce your mortgage rate.
This second kind of points are called “discount points” because they lower the rate on your loan. That rate is calculated by the lender based on your credit rating, among other factors. What is important to know is whether it is worth paying the extra points to lower the interest rate on the entire mortgage.
If a borrower is willing to pay points to bring the mortgage rate to a “par” rate (the best rate available, usually available for the most credit worthy borrowers), or at least closer to the par rate, he will save a great deal of money over the long term, even though he has to put up more money now.
Well, first of all, you should ask to see if your seller will consider paying these points. This frequently occurs in a competitive real estate market when sellers have to make the sale as attractive as possible.
But if you are paying the points, let’s calculate the costs. If you were given a mortgage at 6% on a $100,000 home, should you pay 2 points to lower it?
On a 30 year mortgage, two points will lower the mortgage to 5.5%. Not significant, but how much difference does that make in the long run? The cost of 2 points on a loan of $100,000 is $2,000. What will be the savings over the life of the mortgage?
Any loan calculator you can find on the net will calculate your payments. Total interest at 6% is $115,838.19; total payments is $215,838.19; mortgage payments will be $599.55.
If you paid the 2% point fee of $2,000, your total interest paid on the loan at 5.5% would become $104,404.04 and you total loan amount would be $204,404.04, with a monthly mortgage payment of $567.79.
Did you save with this choice? Of course! The savings in interest are $11,434.15 and your monthly mortgage payments have been reduced by $31.76! Now you know why many mortgagees are willing to pay points.
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