We have lots of borrower's asking if it makes sense to pay a point (1% of the loan amount) to buy down the interest rate. Gene gives an easy to understand explanation. Speaking with your mortgage professional about YOUR situation is important. Sometimes, instead of paying a point, it makes sense to increase your interest rate which will allow your lender to contribute to your closing costs. This is often a good idea for folks who have minimal savings or just need to decrease their out of pocket costs.
Should I pay points on my Maryland loan? Check out Gene's information below then give me a call to discuss your Maryland mortgage needs. If you are in Chicago, give Gene a call! He's your man!!
What's Your Point??
Nawwwww ... Not THAT Point!
A great scene, isn't it? But it's not those "points" I'm going to talk about in this blog. No, I'm talking the "points" referred to when discussing mortgage costs and options.
I've had several discussions as of late, with some pretty confused borrowers regarding these "points". They've had no real grasp of exactly what a "point" is prior to our discussion. What it can equate to in cost to them. How the cost of a "point" is figured. This is especially true with first-time home buyers.
Here's what I tell my clients when starting this discussion ...
The best way to think of a "point" cost, is to remember a percentage point equaling the number 1 ...
One percent (1%) = 1 point
One percent (1%) = .01
Then the cost of the "point" should be thought of this way:
Cost of Point = .01 X Your Loan Amount
Okay, let's put some actual dollar amounts into the equation. It will make better sense to you.
Let's say you are borrowing $200,000 for your mortgage. One (1) "point" then costs you an additional $2,000 at Closing.
Here's the math equation for that:
.01 X $200,000 = $2,000
The question I typically hear as a mortgage lender during these conversations is this ... If these "points" COST me as a borrower ... why would, or should, I even think of buying them? What does buying a "point" accomplish for me
Think of "points" (and the dollars associated with them) as interest earned or paid to the bank. The "reward" for you as the Borrower when buying that "point" is the lower interest rate received for the life of their loan at that bank.
Alot to digest, isn't it? It must be remembered too, that as the markets fluctuate, so does the benefit of paying a "point" ... and the resulting reduction in interest rate earned for doing so.
As a rule ...
1 point paid = 1/8% lower interest rate
Again, let's revisit the math we did above for that:
Paying 1 "point"
Cost of "point" equals $2,000
Let's say, on the day this "point" and mortgage costs are being quoted to you, the interest rate is lowered by 1/4%. We'll say from 4% interest rate to 3.75% interest rate. The savings realized by the borrower each month (for buying a "point") is then $28.60.
Now, there is one more very important thing to figure into considering a "point" purchase ... and whether it makes sense for you to buy the "point" for your mortgage. And that's, how long you expect to be in the property you are buying or refinancing.
Why does that matter? Again, the numbers tell the story ...
We now know that the amount you save in interest monthly for buying your "point" was figured at $28.60 above ... and that you will pay $2,000 at your closing to receive that monthly savings. So to figure what your "break even" time is ... meaning the point where the savings in interest would equal the dollar amount paid on the "point" ... you do the following:
Amount paid for "point" ... $2,000
Amount saved in interest each month ... $28.60
Knowing how long it takes to payback the savings realized by paying a "point" is absolutely essential when making your decision to buy that "point" ... or not. Then you simply need to consider if you plan on being in the property you are buying long enough to reach that "break even" time.
Helping you understand HOW the savings on "points" are figured ... and HOW buying "points" can affect your bottomline ... is an important part of my job, as your mortgage lender.
But the answer and decision is one that only you, the borrower can ultimately make. I hope that this blog helped you do that ...
* Having an experienced, knowledgeable mortgage lender at your side during the many decisions your are called upon to make during your home buying is crucial. Contact me today. I'll put my 35 years of mortgage experience, knowledge, and expertise to work on your behalf. I'll be very glad to hear from you.
I can be contacted through any of the following means:
Direct: 815.277.4036 Cell/Text: 708.921.6331
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If you are considering purchasing a home in Maryland and want to be sure you are mortgage ready, my brother Tony and I will be happy to help! We help to make the mortgage process a pleasure!
If you already own your home, we are happy to provide a no-cost mortgage review to help you to determine if refinancing may be in your best interest. Please contact me at 410-960-2061.