To Pay or Not to Pay: All About Points

You see the ads all the time, whether on television or the
internet: ero Point Loans, or No Closing Costs Loans. Why
would you ever consider paying points for a loan program?
Please, read on.

First of all, the old adage applies, You get what you pay for.
ero Point loans and No Closing Costs loans aren't truly
ero or No Cost. The up front costs are merely added to your
interest rate or absorbed by your mortgage or loan balance. It's
that simple.

This may sound unfair, but the truth is that no one works for
free, and lenders do not lend for free, either. The loan
examples in this article use arbitrary numbers, but they
illustrate factual principles. Once you understand them, you can
weigh your priorities when acquiring a loan and act accordingly.
Understanding what points really are is crucial. It gives you
some measure of control when deciding which loan program meets
your needs, and how much you are willing to pay to have those
needs met. It also protects you from exploitation. Please, keep
reading and, we promise, you'll thank us later.

Whether you are acquiring a new home loan or refinancing an
existing mortgage, a mortgage company usually offers a range of
interest rates for varying amounts of points. A point equals one
percent of the loan amount. For example, three points on a
$100,000.00 mortgage loan would add $3,000.00 to the financing
charges or closing costs. Analyzing various interest rates and
associated points is a good way to save money. As a rule of
thumb, each point adds about one eighth to one quarter of one
percent to the interest rate the lender is offering. Generally,
the lower the interest rate on the loan, the more points the
lending institution will charge. Some companies offer financing
with No Points, but generally charge much higher interest
rates. Why? Because the points are directly added to your
interest rate. It is up to you to choose which rate truly meets
your monthly financial needs, and which rate you can afford. To
decide what combination of rate and points is best for you,
balance the amount you can pay up front to acquire the loan
along with the amount you can afford to pay for your monthly
mortgage.

The less time that you keep the loan, the more expensive points
become. If you plan to stay in your house for a long time, then
it may very well be worthwhile to pay additional points to
obtain a lower interest rate. If you plan to keep the house or
loan for only a short period of time, a so-called ero points
loan is probably the better option. Let's break this down. As an
example, let's say you are buying a $400,000.00 house, using 20%
cash for a down payment. You will be financing the additional
$320,000.00. You could pay two points for a 6%, 30 year fixed
rate mortgage (a cost to you of $6,400.00) and have a monthly
payment of $1,918.56. Or, you can save the money you'd pay for
points, acquire an 8%, 30 year fixed rate mortgage (at so-called
no cost), and pay a monthly mortgage payment of $2,348.05.

Though you paid $6,400.00 in points, the 6% rate saves you
$429.49 a month, and will pay for itself in savings in a little
over a year. Let's take this scenario one step further by
comparing the interest that would be paid over the life of both
loans. $320,000.00 at 6% rate for 30 years: $370,682.20
$320,000.00 at 8% rate for 30 years: $525,296.79 The net
full-term savings of the 6% rate: $154,614.59 Suddenly, paying
$6,400.00 upfront for long-term savings doesn't sound too bad,
does it? Definitely something to consider when deciding whether
to pay points, or not. Some companies may offer to finance the
points so that you do not have to pay them upfront. Please bear
in mind that this means the points will be added to your loan
balance, and you will pay a finance charge on them. Although
this may enable you to get the financing, it also will increase
the amount of your monthly payments.

In Summary:

Paying points for a lower interest rate truly is a trade off
between paying money now versus paying money later. A point -
equaling 1% of the total loan amount - is an upfront fee that
reduces your interest rate and the total interest paid over the
life of your loan.

You need to clearly define your priorities when choosing a loan:
Are you payment driven, hoping for the lowest payment possible?
Or, are you more interested in conserving immediate out of
pocket costs? These are the deciding factors for both the loan
program choice, and the final loan costs. In other words, your
priorities will determine whether To Pay or Not to Pay points
for your loan. Your Real Estate Agent, Financial Adviser, and --
of course -- a quality Loan Consultant can also advise you as to
what's best for your specific financial needs. Please feel free
to call us. We're always happy to assist you.