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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Mortgage Points
If you are buying a home and getting a mortgage or if you are thinking of refinancing a mortgage, a lot of times you will hear the lenders using the word ‘point’.
This you will usually hear when you are trying to consider to buy your rate down.
In this post, we will explain what are mortgage points and check when it makes sense to buy your rate down.
What is mortgage point?
A mortgage point is a cost to you as a buyer, to buy an interest rate that is better than what the lender has offered you according to your qualification.
One point equals one percent of your loan amount.
For example, if your loan amount is $150,000, one point would cost you $1,500.
Let’s say your lender has offered you 2.875% without points, however, you want to get 2.625%. The lender will say that they can get you that rate by charging you half a point on $150,000 which is $750.
This is not a fee that you pay multiple times or every year, it is a one-time fee to buy that rate down.
When does it make sense to buy a mortgage point?
The points are better explained with an example so we are going to use one to understand when does it make sense to buy a point.
Let us take an example of a three hundred thousand dollar loan. One point is one percent of the loan amount which is three thousand dollars.
If the loan estimate provided by your loan officer says that there is half a point to get a 2.625% on a thirty-year mortgage, that means you have to pay $1,500 to the lender just to get 2.625%.
The monthly payments including principal and interest on 2.625% for 30 years are $602.48.
What you need to understand is when you pay that half a percent of the loan amount, how low of the rate are you getting.
If your lender is offering a rate with a buy-down point you also want to ask the lender what rate you can get without any mortgage points.
In this example we will take the interest rate that the lender can offer without points is 2.99%.
Once you have that you want to see how much is the difference in the monthly payments between both the rates.
The monthly payments including principal and interest on 2.99% for 30 years are $631.60.
If you are paying one point to lower your rate on an average you will get a quarter of a percent reduction on your rate and will have a difference of approximately twenty-nine dollars per month.
What you need to do is calculate how much time is it going to take to recoup the point charged and analyze if you are planning to stay in the house for that long.
In our example, it would take approximately 52 months, which is about four and a half years to recoup the points charged.
So it would make sense to buy down the mortgage points in this example only if you are planning to stay in this house for four years and three months or more.
If you are not planning to stay in the house for the time it takes to recoup the loan points charged, you might as well get a rate without any mortgage points.
The math to calculate if it makes sense to buy a mortgage point is given below.
Mortgage Points Calculation
150,000 Loan amount.
2.99% no points: Principal and interest payment=$631
2.625% with a .5pt cost: Principal and interest payment =$602
.5pt in this example is $1,500 so the cost to get the lower rate is $1,500
Payment difference between rates = $631-$602= $29
$1500 divided by $29 divided by 12 = 4.31
You would need to live in the house for over 4.31 years for it to make sense to buy mortgage points.
Conclusion
So the bottom line is, it is all about the math. Do not get mesmerized by the attractive rates advertised by the lenders.
You can also ask the seller to contribute towards your closing cost so that you don’t have to bear the cost for points if you are buying a new property.
However, if you are refinancing, you are responsible for paying the loan points.
Make sure you speak to your trusted loan officer regarding the loan points so that you can make an informed decision.
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