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Real Estate Matters

By Terry Farrell

What’s The Point?

Determining what kind of mortgage to apply for is no longer a simple decision. Just a few of your considerations include points or other fees, term, to lock or to float and time frame and qualification criteria.

It is essential today to work with a competent mortgage professional.

A point is a fee lenders charge which is equal to one percent of the mortgage amount. One point on a $100,000 mortgage equals one thousand dollars in fees. Some mortgages require no points and are originated with a higher interest rate than mortgages with points included.

From a lenders point of view a loan with points paid by the borrower may be offered at a lower interest rate because the lender receives a return on their investment on the first day of the loan. The borrower pays the point(s) as part of the closing costs associated in acquiring the mortgage. Said another way, a loan with a point or points included increases the yield on the loan for the lender therefore the lender may charge a lower interest rate.

In order to determine which plan is better for you, we need to consider the following items.

Do you have the necessary income to qualify for a higher payment with a no point loan?

Do you have the additional cash, assets or equity if refinancing to pay points to achieve a lower mortgage payment?

Is the seller or another entity (like a relocation company) paying all or part of your closing costs?

 

If you can qualify for the higher payment and or have the necessary assets to fund the payment of points, the decision to pay points depends on how long you will have the mortgage. The benefit of lower payments will become equal or surpass the cost of points over time. If you plan to have your mortgage less than three years you are unlikely to recapture the cost of any points paid. If you plan to have your mortgage four to six years you are likely to break even. After six years the benefits of paying points will outweigh the cost of points. Please see the illustration below.

$100,000 mortgage - 30yr. Fixed rate No Points versus Points

Option 1
7.00%=$583.33-no points

Option 2
6.50%=$541.67-2.5 points

Differences

    Option 1 = $41.66/mo more payment

Option 2 = $2,500 more fees

Additional fees ($2500.) divided by $41.66 monthly savings=60 months break even.

The analysis above does not consider the potential deductibility of points or the potential tax deductibility of higher mortgage payments or the present cost of money or the potential future value of the same dollars. Future dollars are potentially worth less because of inflation.

The point is base your decision on whether or not to pay points on your personal situation and consider all the pertinent points discussed here.

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