Rates Versus Points in a Mortgage Loan
While a high credit rating may give you the option of a low rate with no points, some borrowers will elect to pay points to reduce their interest rates.
Paying points in a mortgage loan can be very beneficial
for those who are planning on staying in their home for
a number of years. If there is any chance that you will
be moving within a couple of years, it is highly
recommended that you do not pay points and just accept
the best rate that you can. Therefore, how long you will
remain in the home will make a big difference in whether
you should pay points to buy down a rate or not.
Points are considered to be pre-paid interest and is tax
deductible over the life of the loan.
Paying points upfront on a mortgage loan will reduce your interest rate and save you thousands of dollars if you keep the loan long term.
For example, if you pay one point on a $100000 loan it will cost you $1000 but it dropped your interest rate from 6.75% to 6.25%. The difference in mortgage payments would be only $32.88 which would mean it would take 2.5 years to recoup your $1000.
You will save 10 times your initial $1000 if your loan is kept for the entire length of the loan term. At 6.75% interest rate for 30 years, you would pay $233,493 over the life of the loan. However at 6.25%, you would only pay $221,656. Paying $1000 upfront, will save you $10,837 over the life of the loan.
Many consumers think that for every point you pay, your interest rate should go down by a full point as well. Remember that it does not work this way. Your mortgage professional can do the calculations and let you know what your savings are as well as how long it will take to recoup the costs of paying the points.
Generally you should only consider paying points if you plan on staying in your home for a good number of years. Your mortgage professional should be able to figure out if it will be in your best interest to pay points or not. Sometimes however, paying points may be necessary or required in order to meet a debt to income ratio guideline (DTI) that a lender has. An example of this would be if your debt to income ratio was 50.25% and the lenders cutoff for DTI was 50%. It may be necessary to pay a point and buy your rate down to meet the lenders guidelines here. Your mortgage professional will be able to discuss all of your options with you.
Another advantage to paying any points is that it may be tax deductible. But you also must know what the break even point is & how long you will be in the home otherwise it may not be worth it.
Remember that the points which reduce the interest rate on your mortgage are called "discount points" and are unrelated to "origination points" which you may see on your GFE.
The cost to buy down the interest rate differs at every interval. For instance, to buy down the interest rate from 6.75% to 6.50% may cost 0.5 point (one half percent of the loan amount to buy down a quarter percent in rate), and the cost to buy down from 6.50% to 6.25% may be 1 point (one percent of the loan amount to buy down the next quarter percent in interest rate). In most cases, the lower an interest rate one buys down, the higher the cost to buy the same rate interval.
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Information listed above is to be used for educational purposes only and is not guaranteed
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