Unless you have bought a home, you probably haven’t heard the term point or mortgage point. Or maybe you have heard the term but don’t quite know what it means. Having a general knowledge of what a point is and how it works can help you to make important financial decisions when buying a home.
The cost of purchasing a point is equal to one percent of the total loan amount which is used to buy down the interest rate when buying a home. For example, if the lender offers an interest rate of 4% on a $250,000 loan, and you decide that the payments are too high, you can offer to pay a point (1% of the loan amount) and this would reduce the mortgage rate. The cost of a point in this example would be $2500. So, is it worth the investment of the $2500 to save a little money off your monthly mortgage payment?
A point will traditionally buy down the interest rate by one Quarter of a percent (.25%). It is important to understand the cost of the point, the amount of savings on your monthly mortgage payment and see how long it will take you to break even on the costs.
Here is some simple math:
Take the cost of the point (1% of your loan amount) and divide it by the monthly savings of the rate you have just bought down with points. The answer: 60 months plus or minus a few months to recoup this cost on average. If you know you will be in the house for 5 years or greater, or will not touch the mortgage (refinance), then this is worth it to you. Another example would be if the sellers would be offering to buy points to make the home sale more attractive.
On a $250,000 loan, a 30 year fixed payment at 4.00% interest rate will cost you $1193 per month. If you purchase one point (1% of the loan amount = $2500), your new interest rate would be 3.75%. Your new monthly payment would come to $1157, a savings of $36 per month. I divide the cost of the point, $2500, by $36 (my monthly savings). This will give me the number of months it will take to recoup the cost of my investment. In this case it will take 69.44 months or 5.78 years before you really begin saving.
In My Opinion:
In the case of buying points, it is not a wise investment because of the time it takes to recoup the costs. These potential funds to purchase points can be earning far more in other investments. So, unless the seller is buying down the points for you…don’t bother!
For more information about this article, please contact me at Bill@billnickerson.com