|
Should I Pay Points?
By: Max Hunter iSnare Expert Author
To pay points or not to pay points, that is the question. Before answering the
question it is first important to understand what exactly points are. A point
represents 1% of a home loan. For example, a $100,000 home loan would equate to
each point being $1,000. A home loan of $150,000 would equate to each point
being $1,500. This is important to understand.
Generally speaking you will be faced with the prospect of paying points at two
critical junctures in the home buying process. The first time you may be faced
with this decision is when you need to decide if you want to pay point(s) to
lock-in your interest rate. You may pay a fraction of a point, one point or
perhaps more than one point. When you are approved for a home loan you will be
told an interest rate that you qualify for. That interest rate and your
qualification will be for a specific period of time. It may be 30 days, 45 days,
or 60 days, or any number of days in between.
Your loan officer may then tell you that you can lock-in your rate for a
specified period of time. A failure to lock-in the interest rate may result in a
higher interest rate when you close the loan if the closing date is after the
specified duration of your mortgage commitment. Your loan officer can offer to
extend that interest rate based on your paying point(s). It is important to have
a general sense of what is happening with interest rates in order to make the
right decision. For example, if interest rates have been raising slowly over a
period of time you may decide that it is worth paying the point(s) in order to
lock-in your interest rate.
Your loan officer should be able to give you their best guess as to what
interest rates and what your rate may be if you do not pay to lock-in your rate.
You can then calculate the amount of money this will cost you over a year or
more period of time. A simple mathematic analysis will determine if you are
saving more money by paying the point(s) or not. Clearly you may not decide to
lock-in if you believe the amount of money you will save is negligible compared
to the cost of the lock-in.
The second time you will be faced with this decision is when you are given your
overall loan package details. Generally speaking you will likely be presented
with the option of paying point(s) to reduce your interest rate. So, for
example, you may be told that your interest rate will be 6% with no points,
however, it can be reduced to 5.75% if you pay one point or 5.5% if you pay two
points. Again, mathematics will help solve this dilemma.
You need to have a general understanding of how long you anticipate living in
the home, or how long you will live in the home before refinancing. That is what
you can refer to as the life expectancy of this particular mortgage package.
Simply calculate the amount of your mortgage payments over that period of time
at both interest rates. The difference saved is the important factor. If the
amount saved is greater than the points you would pay to reduce the interest
rate than you may consider paying the points to lower the rate. If the amount
saved is smaller than the amount you pay in points than you may consider
declining the offer.
The key to the decision is having a clear sense of what your plans in the home
are, plans for possible refinancing, etc. Once you have this information in mind
you will find that the decision as to whether or not to pay points will be
clear.
About the Author:
Max Hunter is the author of many credit related articles. If you are looking for help with Home Loans or any type of credit issue please visit us at
http://www.homeloanave.com |
