hat's a Point?
stay in the home (and keep the
mortgage) for a long time, paying
A point, or discount points could very well save you
point, equals one percent of a money.
loan amount. For instance, one a
mortgage loan of $200,000, one To find out whether or not points
point would equal $2,000. will benefit you, you need to
calculate your "break even"
Why Do People Pay for Points? point. In other words, you need
to run the numbers to see how
Some home buyers pay points to many months you'll have to stay
their lender at closing in order in the home to make points a wise
to lower their interest rate over investment.
the life of a loan. Paying a
point on a standard 30-year loan To calculate your "break even"
will typically lower the interest point:
rate by .125 percent.
1. Figure out what your monthly
Should I Pay for Points? payment would be without buying
points.
Buying points can lower the
interest rate of a mortgage loan, 2. Figure out what your monthly
but that doesn't automatically payment would be if you did buy a
make it a good option for every point (or points).
situation. For instance, if you
only plan to stay in the home for 3. Subtract the lower payment
a couple of years, paying for from the higher to determine your
points probably won't help you. monthly savings.
On the other hand, if you plan to 4. Divide the amount charged for
points at closing by the amount point is 119 months, or about 10
you save each month. The number years. You would have to stay in
you end up with equals the number the house for 10 years to recoup
of months you must stay in the the cost of the point you paid at
home (and keep the mortgage) to closing. If you plan to stay in
reach your "break even" point. this house for only three or four
years, paying for points would be
Example calculation: a bad investment.
Let's run the numbers for a Conclusion:
$200,000 loan for 30 years at a
fixed rate. A point equals one percent of
your loan amount. You can pay
1. 7% interest rate with no points to your lender at closing
points = $1,330.60 monthly to lower your interest rate.
payment Paying points may be a wise
option if you plan on living in
2. Buying 1 point for $2,000 = the home for more than a few
$1,313.86 monthly payment years. You should always run the
numbers to determine whether or
3. Monthly savings after the not points are a good investment
point: $16.74 for you.
4. $2,000 / $16.74 = 119 months * Copyright 2006, Brandon
Cornett.
In this example, the "break even"
About the Author:
Brandon Cornett is the editor of http://HomeBuyingInstitute.com, one of the Internet's largest and most respected libraries of home buying information -- more than 100 expert articles in 12 different home buying categories! Put this knowledge to use by visiting http://www.HomeBuyingInstitute.com.
Source: www.isnare.com
