As mortgage interest rates creep up, the question of paying points on a mortgage is popping up again. You might already notice mortgage rate advertisements saying something like, “30-Year Fixed Rate Mortgage, 4.35% with 1 point!” Ok, great, but what the heck is a point, and do you really have to pay it?
Points are pre-paid interest. They are not required. Points are an optional way to buy a lower mortgage rate.
A “point” is equal to 1% of the amount borrowed. On a $200,000 mortgage, one point would cost $2,000. Points may also be purchased in fractional amounts. In this example, points of 0.500 and 0.250 would equal $1,000 and $500, respectively.
Does paying points make sense in the long run? You really have to do the math to get the answer, and everyone’s situation is different. Much depends on how long you intend to stay in the home.
We’re going to use an example from Bankrate on the math. Say you’re getting a 30-year fixed-rate mortgage for $165,000, at 6% interest. The monthly principal and interest, or P&I payment, would be $989.
The same lender might offer you a 5.5% rate if you pay 2 points. This would translate into an up-front interest cost of $3,300, based on a $165,000 loan. In return, your new P&I payment at 5.5% interest would be $937.00. This saves you $52 a month.
Doesn’t sound like much of a return, does it? Let’s do more math! $3,300 divided by $52 = 63 months. This means you’d break even on those points in about 5 and 1/2 years. The longer you stay in the home, the more you’ll thank yourself for paying those points in the beginning.
Befuddled by mortgage-speak? Fear not! StartingPoint Realty can refer you to trustworthy, local mortgage lenders who will take the time to explain your mortgage options. Contact us for a personal referral! There’s no obligation.
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Ryan Gable Broker/CEO Starting Point Realty
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