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WHAT'S THE POINT?

When shopping for a mortgage, buyers are inundated with numerous types of loans and options. One of these involves paying points. To understand points, it’s necessary to know how a lender earns money on a mortgage. The two primary ways are through fees a customer pays up front and through the interest rate. In some cases, the lenders may offer a lower rate. However, to compensate their loss in earnings for this lower rate, they will charge the customer discount points. One point is equal to 1% of the loan amount. Is the lower rate worth the extra money (points) a customer may have to pay up front? A simple example can illustrate this.

Assume the lender offers a 30 year fixed rate mortgage at 6 percent on a $100,000 loan amount. The payment (principal and interest) would be $599.55 per month. Let’s say you ask the bank for a lower rate and they then offer you a loan at 5.5%, but they charge you 2 discount points to take advantage of this rate. In this case the 2 discount points are equal to $2,000, which must be added to your closing costs. The monthly principle and interest payment on your loan at 5.5% is $536.82, which is a $62.73 savings each month from the loan payment at 6%.   

How long would it take you to recoup the $2,000 you had to pay up front to take advantage of the lower rate? To find out, you simply divide your savings of $62.73 each month at the lower rate into the cost of the points, $2,000. The answer is 32, which means it would take you 32 months to recoup the points you had to pay at closing. This means you would have to stay in your home and not refinance your loan for at least 2 years and 8 months to begin taking full advantage of the lower interest rate.

Please note:  Lenders may also use an "origination fee" in the same manner as illustrated above.

How can I help in this situation? I'm very familiar with financing and can tailor  your real estate contract to meet your financial goals. In the above situation, if the lower interest rate and payment is your primary goal, we could write an offer asking the seller to pay all or some of the points you are charged. This means you could realize the savings from the lower rate immediately!  A slower market means sellers are much more willing to negotiate.  You may actually save much more money in the long run by asking a seller to pay points to lower your loan interest rate instead of asking the seller to reduce his/her price! 

The financing aspect of a real estate transaction can be tricky. Today’s complicated environment necessitates the use of a professional who can tie all aspects of the process together.  I can and will do that!  Please visit my mortgage calculators page for additional information.

Thank you for your time!

Mark Trafton