Why ‘Points’ In Most Cases, Are a Bad Idea

Why ‘Points’ In Most Cases, Are a Bad Idea

When shopping for the best deal on a mortgage, most people focus in on what the interest rate is going to be.  After all, if you get the lowest interest rate, then that must be the best deal right?  Not so fast.  Although the interest rate is an important variable, it certainty shouldn’t be the only variable to consider. 

A lot of times mortgage banks will quote you an interest rate with the option to pay more money upfront in the form of ‘points;’ to lower your interest rate over the life of the loan.  This is a way for them to differentiate themselves from the other lenders in the market, in the hopes that by offering you a lower interest rate, you will be enticed to choose them over their competition.  Here is why this isn’t normally an option that you would want to consider.

mortgage-points property guidingOne point on a mortgage means precisely 1% of the loan principle amount.  Therefore, let’s say you planned on getting a home loan for $200k; you would pay exactly $2,000 in additional costs.  The effect on your interest rate for paying 1 point varies, but might be in the order of ¼ of 1%.  At today’s rates, you might lower your 30-year mortgage from 4.75% to 4.50% providing a savings of approximately $25.00 per month.  If you do a breakeven analysis, you will find that it will take 80 months, or just shy of 7 years, before you would get a return on your investment.  It is well known that most people don’t actually remain in their mortgage for the entire 30 years, but instead, either refinance or sell their home after five to seven years.  Therefore, with the example given, you would be lucky to ever breakeven.

The important thing to remember is that the monthly savings by paying points is a fraction of the upfront costs.  Furthermore, points make even less sense on a shorter term loan since there is even less time for the opportunity to incur savings.

Not sure who to call or where to start? Contact me today for a 100% free no-obligation loan inquiry analysis.

Matt Pell,  Loan Officer
Mortgage Warehouse, LLC
(239) 672-8502 – Direct Line
(239) 344-9223 – Fax
Company NMLS ID – 137154
Individual NMLS ID – 1018529
Better Business Bureau Rating = A+

Posted on July 15, 2013, in Finance and tagged , , , , , , , , , , , , , , , , , . Bookmark the permalink. Leave a comment.

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