Deciding How Many Points You Want to Pay on Your Home Loan

Many people don?t really know what ?points? are when it comes to negotiating their mortgage. Points are fees that one pays to the lender at the closing of the home loan. One point is 1% of the mortgage. If, for example, you pay one point on a $100,000 loan, you will pay $1,000 at the settlement.

The idea behind points is to lower the overall interest rate on the home loan. Points, tough, are used in different ways by different lenders, so that one point at one lender may reduce your loan by 3/8%, whereas at a different lender it may be worth ?%.

The main thing to consider when you are deciding upon paying points is how long you plan on living in your home, and whether or not you can afford to pay the points upfront. If you need to borrow to pay the points, you will probably lose any advantage since you will have the additional interest. In many instances, especially for young buyers with a starter house that they hope to move out of in a short while, one should not consider paying for points.

You have to look upon points that you pay as an investment in your loan. It may sound like a good idea to lower your mortgage rate from 6% to 5%, but if you will only reap the benefit for a year or so, the investment may not be worth while. It is rather like prepaying part of your mortgage interest bill.

You can figure whether or not it makes sense for you to pay points, depending on how long you will be in your home; use one of the many calculators on the internet or ask a mortgage consultant to do it for you, free of cost.

Here is how the idea works: If you pay $1,500 in points, you might be able to reduce your mortgage rate to 5.5%. What is the breakeven point in this scenario, based on the different rates? The cost of a $100,000 15 year mortgage at 5.5% is $599.55 per month. For a 30 year term, it will be $567.79.

This is a clear savings of $31.76 per month, but remember you had to pay $1,500 to receive this savings. When you divide that $1,500 by the savings of $31.76, it takes almost 4 years, 47.23 months, to recover the cost. In other words, if you don?t think you?ll be in the home for about 4 years, you get nothing by paying the points.

After that point, however, the upfront investment of $1,500 is covered, and you will now save a net of $31.76 each month. That can be a real savings if you keep your home for thirty years and save $31.76 a month; in fact, it will add up to $9,933.58!