When it comes to mortgages, choosing the right one is instrumental to successfully achieving the American Dream of homeownership. And for many buyers in today’s market, taking advantage of points is one way to ensure their mortgage truly fits their needs.
In its simplest definition, a point is an additional loan fee that is paid to the lender in exchange for a lower interest rate. Often referred to as “buying down,” points allow you to reduce the mortgage rate for the life of the loan. Before making a decision on whether or not utilizing points is the best choice for your personal situation, you’ll want to discuss what it all means with your agent and lender.
As an example, if you secure a mortgage loan for $500,000 without points, at 4.6 percent on a 30-year mortgage, your payment would be approximately $2,560 a month. If one was to pay two points ($10,000), the interest rate in this example would go down to 4.1 percent and the monthly payment would be around $2,415, saving you a little over $145 a month.
In this scenario, it would take you about eight years to recoup the money you paid up front. Therefore, if you plan to stay in the home for a period of time, this will save you money in the long run.
Homebuyers should also ask themselves some key questions to determine if paying points is a wise decision: How long will you keep the home? Do you have extra money to pay points? Could that money be better used for something else?
For instance, a savvy investor might be better able to invest that $10,000 and find greater dividends than $140 a month, but you have to weigh the variables, and if you’re not someone who does a great deal of investing, it could backfire.
Mortgage experts have a simple formula for people to follow: If you plan to stay in the house for less than three years, do not pay points. If you plan to stay in the house for more than five years, pay one to two points. If you’ll be in the house for three to five years, paying points doesn't make a significant difference. Anything more, and paying points is a great idea.
Another positive associated with paying points is that they are interest-payment related, so they're fully deductible on your taxes in the year that you close.
The decision to pay points is something every buyer will have to make depending on their own individual situation. Mortgage points can add up to valuable savings over the course of your loan, but the future isn't always predictable. Even if you “plan” on staying in your home for 20 years, changes in your career or family life could alter the plan.
To learn more about points, contact our office today at 1-800-238-4646 or email us at firstname.lastname@example.org.
By Keith Loria