"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 interest 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. Points don't necessarily to equate to a negative term, so, get this out of your head now.
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: Calculate the amount of your monthly mortgage payment at the normal interest rate. Calculate how much your monthly mortgage payment would be if you did purchase one mortgage point.
Subtract the lower payment (results from number 2) from the higher payment (results of number 1). 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 pay mortgage points (just keep in mind, with refinances, these fees are typically rolled into the total loan amount). Having the points available as a dollar amount will also make it easier to negotiate.
Tabitha Naylor is an experienced mortgage broker/consultant with Apex Financial Mortgage. For more information, or additional resources on home loans, visit Apex Financial Mortgage