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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.
Whether
you’re thinking about buying or selling or seeking information, rely on RE/MAX
Best Associates 800-391-BEST(2378) or 913-345-BEST(2378) to provide accurate up
to date information about the marketplace.