July 31, 2008
Mortgage Points: Why Pay For Them?
Mortgage Points: Why Pay For Them?
If you are in the market for a home or considering refinancing your current mortgage, you probably have heard your mortgage professional talking about points. They may advise you to buy points or they may advise you not to, depending on your situation. The question is, do you really understand points and when it makes sense to buy points?
A point is 1% of the loan amount. So, one point on a $100,000 mortgage costs $1,000. Points can be purchased in increments down to an eight of a point. It's not any more complicated than that. When should you buy mortgage points?
The pros of doing this are really pretty easy to understand. By pre-paying your interest, you get a lower rate and therefore a lower payment for the life of your loan. The cons of buying points are that you must stay in the home for a certain period before you "break even" on the transaction.
For example, if you have a $200,000 mortgage and you buy two points, you will pay $4,000 for those points at closing. If buying the points lowers your payment $250 a month, you'll need to stay in your house at least 16 months to break even (16 × 250 = 4000). In this example, after 16 months you'll start making money. After several years, you'll save a lot of money.
One other thing to keep in mind about buying points up front: Points may be tax deductible, so there is an added benefit if you qualify for the tax deduction. Check with your tax advisor before you deduct points on your taxes.
If you have any questions or comments about points, just click the comment link below and sound off. We'll get back to you with answers to any questions you might have. We'd love to hear from you.
Comments on Mortgage Points: Why Pay For Them? »
Amanda @ 10:23 am
Hi a question about mortgage points. We are in a situation where we currently have a 1st mortgage@ 5.5% and a 2nd mortgage (HE) at 10.5% which was taken out at 110% above loan to value. We owe $73,500 on the 1st and $87,000 on the 2nd. Total loan of $160,000, more than the house was appraised at or assessed at. Our mistake. Now we are in a situation where our house cannot sell, we will not make any money off of it to pay the 2 loans and have contemplated filing bankruptcy. Our 2nd mortage holder has agreed to try and refinance both loans for us at 5.25%, and borrowing $167,000 to include closing costs, however they are asking us to also pay 4 points. They also told us we needed to get an appraisal which cost $280.00 and the appraisal came in at $200,000. Which confuses me because we had a appraisal done 2 years ago and it came in at $154,000 and we have done nothing more to the home. (differnt companies). We had a realtor come in and he said it might be able to sell high end $153,000 and low $130,000. Are they trying to create a situation so they can just get the loan? We know our home is not worth $200,000. They say 1/2 of the points will be included into the loan and the remainder we are being asked to pay??? Why are they asking us to pay points when they are offering the 5.25% to all buyers and are advertising that %. In my opinion the points are not buying us a lower interest rate. What are they trying to do??? Help or hurt??? Your comments are greatly appreciated. Suggestions and questions to ask please!!!!! We are desperate.
T. J. Lamb @ 12:13 pm
Amanda,
A few thoughts, based on the information given. Appraisal at $200K is biggest red flag. Might ask them why? May have been pegged at $200K to cover 20% down.
4 pts is quite a lot. Points can be paid to recuce rate, but also can be to reduce risk. That said, would think your credit must be good in order to qualify for this scenario, but I find the loan offer a bit odd in the current climate.
I suppose if their proposal helps you out a lot and you are comfortable with the terms and the lender is reputable, might be worth considering, but consulting a real estate attorney on all terms and documents might be worthwhile.
Best wishes and Happy Holidays.
T. J. Lamb
T. J. Lamb Real Estate, "The Buyer's Company"