Best Mortgage Advice On Buying Points
Regarding Best Mortgage Advice On Buying Points: Kate, what is your best advice on discount points? What is the purpose of points? Are they just a gimmick for the bank to get more money out of your pocket?
Kate Answers: Best Mortgage Advice On Buying Points
Hi Tom, A discount point, also known as prepaid interest, reduces a mortgage interest rate generally for the term of the loan. Each discount point costs 1% of the loan amount and lowers the interest rate by approximately 1/8th of a point. The exact amount can vary day to day.
Let's use these numbers in our illustration:
- 30 year fixed rate mortgage
- $250,000 loan amount
- 6% interest rate
- $1494 monthly payment
By paying 1% in discount points, it would cost $2,500 upfront and lower the interest rate to approximately 5.875%.
The $2500 discount point would reduce the monthly mortgage payment around $15 a month.
Over 30 years, the $2500 discount point of 1% results in mortgage payment savings of approximately $5500. Not too bad.
However if you follow the trend of most homeowners, keeping the mortgage only 5 years, you save $900 in reduced payments.
This means you spend $2500 in upfront discount points to save $900 over 5 years.
My Best Mortgage Advice
If I were thinking of buying discount points, I'd ask myself:
- Do I think I'll keep this mortgage long enough to make paying points up front worthwhile?
- Do I have enough cash to spend on discount points?
- In the case of buying a house, can I negotiate for the seller to pay my points?
Consider these points to determine if paying discount points is in your best interest. You can probably come up with some of your own best mortgage advice
pertaining to your individual circumstances.
Please keep in mind these figures are approximate only. You should consult your mortgage professional for exact figures pertaining to your specific situation.
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