Points

by Brian Berman on February 25, 2010

The first question clients normally ask is are they any points associated with my loan.  With the advent of the NEW GOOD FATIH ESTIMATE (GFE) origination costs are now even more understood.  Points are nothing other than a tool your loan officer can use to make sure you are getting the most “bank for your buck.” One point is equivalent to 1% of the loan amount. If you are going to borrow $300,000 on your loan, one point would equal $3,000. Market conditions dictate what the best choice will be at the time you want to buy a home. Ask your lender to show you a variety of program options so you can compare the difference between paying points and not paying points.
With the NEW GFE it is very easy to tell if you are paying points.  On page 2 of the GFE in box 2 there are 3 check boxes.  If box 3 is checked and sometimes if box 1 is checked you are paying points!  If box 2 is checked you broker is giving you a credit towards your closing costs which is great!
Paying points can be a prudent financial move, if you are planning to be in the loan for a long period of time. Again, one of the most important questions to address when you borrow money is, "How long do you need to borrow this money?" This will answer the two all-prevailing questions you will have, which are 1) should I pay points? And 2) what loan program is best for me? Notice that the question is not geared to, "How long do I plan to live in the home?" but more appropriately, "How long am I likely to be in this loan?"

How long you will be in the loan is not only affected by the tenure that you own the home, but also the probability of seeking a refinance at some point in the future. As a general rule of thumb, you will need to be able to recuperate the total cost of the points in a period of time that is less than the amount of time you will need to borrow the money.

Here’s an example. Let’s say you are going to borrow $300,000 for your mortgage, and choose to pay one point, which equates to an initial upfront cost of $3,000. If paying one point up front saves you $100 a month, this means it will take you 30 months or 2.5 years, to recuperate the cost of the point that you paid. If you refinance the home anytime before that 30-month mark, or decide to sell the home, you will have effectively wasted money. However, if you keep that loan for longer than a 30-month period of time, it is a prudent financial move.

When deciding whether or not you should pay points, take into consideration where interest rates are at when you seek financing, and compare that to historical market trends.  When rate are near historical lows, it may be a good idea to discuss the benefits of paying points.  If they are not near their lows, then paying points does not make sense because often times rate will drop and a refinance may save you additional money!   

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Mortgage Atlanta, LLC. 601 Woodlawn Dr,, Suite 340. Marietta GA 30067. Phone: 678-564-1522 info@mortgage-atlanta.com

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