Will Points Make A Difference?

Let’s talk about mortgage payments. Some common ways to lower your mortgage payment are to make a larger down payment and to improve your credit score. Improving your credit score is especially important when you’re applying for a mortgage.

Here’s another way to lower your payment – buy down the interest rate for the life of the mortgage with discount points. So, what’s a discount point? It’s one percent of the mortgage borrowed. Lenders collect this fee up-front to increase the yield on the note in exchange for a lower interest rate.

If borrowers are willing to pay discount points at the time of closing, a permanent buy-down on a fixed-rate mortgage is available.

So let’s look at some options. Let’s say you have a $315,000 mortgage for 30 years at 4% interest with no points compared to a 3.75% interest rate with one-point.  The principal and interest payment on the 4% loan would be $1,503.86 compared to $1,458.81 on the 3.75% loan.

The $45.04 savings is available because the buyer is willing to pay $3,150 in points.  By dividing the monthly savings into the points paid, you can determine the breakeven point.  In this example, if the buyer is planning to stay in this home for at least 70 months, they would recapture the cost of the points and each month after that would be savings.

Here’s another interesting thing you might want to consider. Lower interest rate loans amortize faster – so in other words, they build equity faster by paying off the loan sooner. If the buyer stayed in the home for 10 years, their unpaid balance in this same example would be $2,117.38 lower than the 4% mortgage.  Combine that with the $2,259.29 in savings from the breakeven point to the end of 10 years and the buyer, in this situation, is $4,372.67 better off buying down the mortgage by paying the additional points.

Need a benefit? It can be difficult to come up with the extra amount of funds for those points, but the points paid are considered interest by the IRS, and they can be deducted in the year in which they were paid.

A rule of thumb commonly used is that one discount point lowers the quoted mortgage rate by ¼% or 25 basis points.  A lender may quote X% + .6 points for a mortgage.  Using this scenario, to lower the mortgage rate by .25%, the buyer would need to pay 1.6 points. It is important to note that each lender determines the pricing of points for the loans they make.

Depending on how long a buyer is planning on being in a home, it may be quite beneficial to pay points. To help you determine whether paying points should be considered, use this Will Points Make a Difference and download the Buyers Guide

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