| In order to get a lower monthly payment lenders will | | | | - lowers the monthly payment to $615.00 monthly |
| give the borrower the opportunity to pay an up front | | | | - save $11,880 in total interest repayment |
| fee which lowers the interest rate thus, paying less on | | | | The above scenario makes sense if you plan on |
| their month to month housing note. | | | | staying in the home for at least 5 years (break even |
| A good online mortgage calculator will do all the | | | | point). |
| computation and analysis for you but we'll explain it for | | | | Again a good online mortgage calculator will clearly let |
| you below.... | | | | you compare a loan with points and without points so |
| Here's how it works: | | | | you can determine : |
| The up front fee is called "points". You typically pay 1% | | | | - Total interest saved |
| of the amount borrowed for each point: | | | | - How many years break even |
| Let's illustrate: | | | | Break Even Point ...Huh? |
| If the amount borrowed was $100,000 then 1 point | | | | The break even point is the number of years it takes |
| would cost you $1000 ($100,000 x 1%) This in turn will | | | | to re-coup the expense of paying for the points |
| lower, or "buy down" your interest rate by .25%. For | | | | upfront. To get a financial benefit from buying down |
| example, if you only qualify for a 6.75% mortgage rate | | | | your interest rate by purchasing points you need to |
| on a $100,000 loan, paying your broker $1000.00 up | | | | stay in your house until after the total of the monthly |
| front can reduce the rate to 6.5%. | | | | savings realized is greater than the total amount of |
| Determining if this is a wise move financially for your | | | | cash dished out on points. |
| family depends on a few factors, mainly the length of | | | | To Illustrate... |
| time you are planning on staying in the home. Again, a | | | | The cost for 2 points above was $2000. Each month |
| good online mortgage calculator will compare the loan | | | | you save 33 bucks because you lowered your |
| with and with out points. (The online mortgage | | | | interest rate. So... $2000/$33 = 125 (payments or |
| calculator will ask you for principal, interest rate and | | | | months) which is about 5 years |
| number of points) | | | | After about 5 years you've paid back all the cost of |
| In another example borrowing $100,000 for 30 years | | | | the points which now gives you the opportunity to |
| at 6.75% with no points would result in a payment of | | | | avoid $11,880 in interest had you not purchased points. |
| $648 monthly (Principal and interest only... no tax or | | | | So, points are not always bad if you want to lower |
| insurance in this example) | | | | your interest rate, It really depends on how long you |
| The same loan but charging the borrower 2 points: | | | | plan on staying in your home and how much cash you |
| - drops the interest rate to 6.25 % | | | | have at the time of closing. |