|Without Points||With Points|
|Amount Financed :||$250,000.00||$250,000.00|
|Monthly Principal & Interests :||$1,342.05||$1,266.71|
|Monthly Payment Savings :||$75.34|
|Points Value :||$2,500.00|
|Monthly Investment Savings :||$10.42|
|True Monthly Savings :||$64.92|
|Break Even :||3 Years 3 Months|
When applying for a mortgage, you will most likely be presented with the option to pay points to lower your interest rate. In order to determine if this investment is worthwhile for you, you will need to know the amount of your loan, the interest rate before the purchase of points, and the interest rate after the purchase of points. You will also need to know the length of the loan and your savings rate.
If you are taking out a $250000.00 loan with an interest rate of 5.000%, you might be able to buy down the interest rate to 4.500% with points. If you are getting a 30 year loan and paying for your points, your monthly payment (principal and interest only) will change from $1,342.05 to $1,266.71. This will give you a savings of $75.34.
But, if you put your money in the fund with an average savings rate of 5.000% rather than purchasing points to cut an interest rate of your mortgage loan, you might get $10.42 per month from your investment. When you figure in your investment savings, your true savings will be $64.92 per month.
After considering the cost of paying for the points, you will break even after 3 years and 3 months.
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There are two types of points you can pay on your mortgage loan: Discount points, which are a form of pre-paid interest, or points that are charged for the origination of the loan. Determining whether you "should" pay points on your loan depends on what your financial goals are and how the points will affect the other terms of the loan, such as the interest rate or the other closing costs.
Discount points are usually paid to reduce the amount of interest you pay on the loan. Every point on the loan is equal to 1 percent of the total loan cost. Depending on the loan, you may be able to pay up to 4 points. For example, 1 point on a $200,000 loan would be $2,000. If you paid 4 points, you would pay $8,000.
The amount you can save on your interest rate by paying for points will vary by lender. However, for each loan point you purchase, you can typically reduce the interest rate on your loan by 1/8 percent or 1/4 percent.
Take the example of the $200,000 house: If you have a 30-year fixed-rate loan with a 4.5 percent interest rate, your basic monthly mortgage payment would be $993.10. However, if you pay two points and your interest rate drops to 4 percent, your monthly payment would be $954.83.
Not only can paying points save you money every month, but it can also save you thousands in interest over the life of the loan.
However, if you do not plan to stay in your home over the full life of the loan, you need to carefully evaluate your potential savings. Though you will pay less each month, you will also pay more up front. You should stay in the home long enough to recoup your investment through your monthly savings, or you may end up losing money by paying points.
Some lenders charge points to cover the expense of originating the loan. Some loans may charge fees in place of some closing costs. If you pay points in place of some closing costs, you can deduct the fees on your taxes, providing you a cost savings at the end of the year. However, if the points cover fees that would normally be charged during closing, you can not deduct them.
If you are able to deduct the points on your taxes, there is an advantage to paying points for origination fees. If you are not able to deduct the charges, you should analyze your statement carefully to be sure that you aren't paying more in origination and closing costs than you need to pay. Work with your broker to get a proper understanding of all the fees.
Using the above calculator can help you to determine whether paying points on your mortgage is really worth it to you to help you meet your financial goals. You can use the calculator to learn just how much you can expect to save both on your monthly mortgage payment and during the life of the loan. Experiment with different point values to see how you can maximize your savings. Keep in mind how long you plan to stay in the home when making your decision. If you only plan to be in your home for five years or so, you may consider how you can put the money toward other investments that may have higher yield than what you can expect to save on interest.