Understanding Mortgage Points and When It’s a Good Idea to Pay Them
by Terrie J. Burd
First of all, what are points? In simple terms, points are paid by a borrower to a bank to lower the rate on a mortgage alberta mortgage brokers. One point is 1% of the loan. In other words, if you are required to pay 1 point, you would have to pay $1,000 on a $100,000 loan.
The idea behind points is to lower the overall interest rate on the mortgage. There are different ways of calculating the advantage of a point, depending on the lender, but an example would be if you paid 1.5 points to reduce your loan from the posted rate of 6.25% to 5.875%, or to 5.375% if you paid 2 points.
The longer you plan to live in the home, the more attractive it is to pay points; you also have to decide if you can afford to pay the points calgary mortgage. If you need to borrow to pay the points, you will probably lose any advantage since you will have the additional interest. For many first time home purchasers, points are not a good idea, since they will want to move to a different home in the near future.
Points need to be viewed as an investment in the mortgage. Perhaps you decide to pay 1.5 points to get a reduction from 6% to 5.5%, that’s the investment you are making. You are paying a part of your interest in advance, effectively.
You can figure whether or not it is worthwhile for you to pay points, depending on the length of time 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.
The $100,000 loan we are discussing would require $1,500 in points to lower the rate to 5%. Then it is a matter of finding the breakeven point, by examining the mortgage payment differences between the two rates. The cost of a $100,000 15 year loan at 5.5% is $599.55 a month. The monthly payment for a 30 year. 5.5% loan is $567.79 a month.
The lower rate mortgage is $31.76 a month lower, but you have to pay points to get this smaller payment. $1,500 divided by $31.76 is 47.23 months, or almost four years. If you don’t plan on staying in your home for this length of time, you will not have any advantage from paying points.
However, once the 47.23 months have elapsed, each month payment is a savings. If you, unlike most homeowners today, remain in your home for the full thirty years, you would have saved $31.76 over those years, which is a total savings of $9,933.58.
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