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WHAT POINTS ARE: Short for 'Percentage Point', it is a term that
refers to a fee or cost incurred by the borrower in a Loan Transaction that equals 1 Percentage
Point of the total Loan Amount. For example, paying a point on a $300,000 loan costs the
borrower $3,000. Paying 2 points on that same loan would be a cost of $6,000.
WHEN PAYING POINTS IS GOOD: Paying points can allow you to 'buy' a lower
interest rate. This is possible because most banks---just like brokers---will eventually
package your loan and sell it to someone else. Anyone who has purchased a home before has
undoubtedly experienced this before: opening a piece of mail notifying you that a 'new bank'
now holds your mortgage. The interest rate a bank charges you on your mortgage effects the
price they can turn around and sell it for on the 'Secondary Market' and, obviously, they can
sell a loan with a higher interest rate for a higher price (all other things being equal).
Giving you a lower interest rate means that they make less money when they re-sell the loan;
they make up for that difference by charging Points.
Is it good to pay these points and 'buy down' your rate? Often times it is a very good bet. For
example, paying a Point on a $300,000 loan amount may cost you $3,000 but it may also save you
about $75 a month on your payment as well as increasing the amount you pay into principal by
about $20 a month. If you stay in that loan for 3 years and 3 months then you will recover the
cost of paying the point. After that point, your savings total about $1,100 dollars each year
thereafter---in other words, you have a guaranteed 'Return' of about 37% on your
'investment'.
WHEN PAYING POINTS IS NECESSARY: Many mortgages have what is referred to as a
'Hit', which is a fee payed for a riskier loan condition. For example, since a mortgage on an
Investment Property is considered a greater risk than a mortgage for a Primary Residence, you
might have a 'hit' of 2 points on that mortgage because it is an Investment Property. In this
case, the Mortgage Company doesn't make ANY money off of those points. It is due strictly
because the loan is considered less profitable or riskier. Generally the Mortgage Company will
charge you a higher interest rate rather than charge you the points but, in some cases, it is
not possible.
WHEN PAYING POINTS IS BAD: There are a few instances wherein paying points is
not a good idea. To begin with, when there is a strong likelihood that you will be moving
before 2 or 3 years pass. Although you may enjoy the benefits of lower payments during that
period, you might not 'get back' the amount of money you paid in points.
Another time is when paying points is the work of good old-fashioned greed on behalf of your
Loan Officer. How do you know when a Loan Officer is trying to take a little too much of your
money? You actually won't know for certain until you see the 'Final HUD', which shows exactly
how much of your money will end up in the hands of the Mortgage Brokerage you are working with.
Review the Final HUD in detail and ask questions about the Mortgage Brokerage's profit from the
loan---are you comfortable with that amount? Voice your opinion and concerns, if any. Become an
active, informed participant in your finances.
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