When you go to closing on a mortgage, you have a number of options available to you. One of these is to pay points so that the interest rate can be reduced. Here is what you need to know to help you determine if you should pay points on your mortgage.
A mortgage point is equal to 1% of the total cost of the mortgage. So, if you are getting a mortgage for $150,000, then it will cost you $1,500 per point. For each 1% of interest, there are 8 points. In other words, it will take 8 points to bring down the interest rate one full percent. Each point paid will reduce the interest percentage by 0.125%. Usually, you can see some savings if you bring it down even one point.
Paying points at closing can reduce your interest and bring you savings, but not everyone can benefit from it. Generally, you would need to stay in your house for a number of years – it really will not help if you are not going to stay long.
The reason for this can be seen in the following example. This will show you how to determine how long it will take to break even. If you buy a house for $100,000 at 7.5% interest, then you would be paying around $700 per month. If you spend $1,000 to buy one point, this will reduce your interest to $7.375%, and now you will have a payment of about $691. The difference in your payments is now around $9. By taking the $1,000 that you paid, and dividing it by your amount saved ($1,000 / $9), that will give you an answer of 111, which is the number of months you need to live there in order to break even.
In the above example, you would need to live in that house for 9 years and three months to break even. This is why it is necessary that you want to live in your home for a while before you begin to realize any savings.
If you plan on staying for a shorter time period, then you may want to reduce your costs other ways. This can be done through paying a larger down payment, making sure your total indebtedness is low and your credit score high, or by simply paying more each month. In order to know which approach would be more beneficial, be sure to go online and find some good mortgage calculators to help you find out.
Also, when you go to get your mortgage, get a number of quotes from different lenders and find out which one offers the best deal. All you need to do is to compare them carefully in terms of interest rates, fees, total cost, and what options you have. Before long, you will find that choosing the best of the offers will enable you to save possibly thousands of dollars over the lifetime of the mortgage.