4 Points to
Calculate
Are you getting ready to buy a new house, and you’re
curious about mortgage points? Mortgage points are fees
paid to a broker or lending institution that are linked
to your mortgage’s interest rate. In general,
the more points you pay, the lower your mortgage’s
fixed rate will be. Since the lender is receiving payment
up front in a lump sum, the fixed interest rate you
pay on your mortgage can be lowered slightly.
One point equals approximately 1 percent of the amount
of the loan. For example, for a loan of $200,000, one
mortgage point would equal $2,000. Mortgage points are
usually paid at closing, in cash. Some buyers borrow
money in order to pay points, though this will increase
the closing costs and the amount of the loan.
So how much do mortgage points save you in the long
run? In most cases, buying mortgage points will only
lower your interest rate slightly. Typically, each mortgage
point you buy lowers your interest rate by 0.125 percent.
So if you have a 6.5 percent rate, and you purchased
one mortgage point, it would be lowered to 6.375. You
will need to use a mortgage calculator to see how much
you save each month. You should also calculate how long
it will take before you reach the ‘break even’
point. The break even point is when you recover the
cost of purchasing the mortgage points. There are four
steps in calculating the break even point:
1) Calculate the amount of your monthly mortgage payment
at the normal interest rate.
2) Calculate how much your monthly mortgage payment
would be if you did purchase one mortgage point.
3) Subtract the lower payment (results from number 2)
from the higher payment (results of number 1).
4) Divide the amount of one mortgage point by the amount
saved each month (results to number 3). The result of
this calculation is the number of months needed in order
to reach the break even point.
In general, the simplest method in calculating whether
you should purchase mortgage points is to decide whether
you can afford to make the upfront payment required
at closing. If you are interested in purchasing mortgage
points, but have to struggle to find payment for them,
perhaps they are not the best option for you. Borrowing
to pay for mortgage points will not only increase the
closing costs, but also the amount of your loan.
You should also keep your specific situation in mind
when deciding whether to purchase mortgage points. Are
you planning on keeping this mortgage for a short time,
or an indefinite period? If you expect to keep your
mortgage for a long time, it may be a good idea to purchase
mortgage points. The longer you plan to stay in the
same house, the more you’ll benefit from the lower
interest rate that buying mortgage points at the time
of purchase can allow you.
If you’re interested in purchasing mortgage points,
be prepared to negotiate before signing. But before
you reach the negotiating table, make sure you know
what to expect as to the costs of purchasing mortgage
points. Check your local newspaper to research current
rates. This will give you a good idea of how much it
will cost to buy mortgage points.
One of the simplest ways to make purchasing mortgage
points relatively painless is to let the seller pay
for a portion of them. You will need to discuss the
terms of your loan with your broker or lending institution
to see if this option is available. If it’s allowable,
you can negotiate with the seller to see if they are
willing to pay for a portion of your mortgage points.
The seller will likely ask to raise the price slightly,
but even so, you will be able to move into the house
for less.
When speaking to your broker or lending institution,
you should ask for points to be quoted to you as a dollar
amount, and not as percentage points. This way you will
have a clear idea of how much you will be required to
pay, if you do decide to buy mortgage points. Having
the points available as a dollar amount will also make
it easier to negotiate.
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