« « Understanding Points and Buydowns (3)

Understanding Points and Buydowns (4)

Points are normally charged by mortgage lenders as a way of increasing their upfront profit and of offsetting the uncertainty of a loan that would normally go fifteen to thirty years. However, since few mortgages go to their full term anymore, because owners sell their homes or refinance their mortgages much earlier, points can be a profitable way to attract investors looking to make money in mortgage securities.

Is paying points worth the result? The answer is yes and no. It usually depends on how long you’re going to live in the home before the savings in having a lower interest rate and the cost of the points comes out the same. For example, a $225,000 loan at 6 percent interest for thirty years costs $1,348.99 a month in principal and interest.

If you pay $4,500, or two points, to buy the rate down to 5.75 percent, the monthly payment reduces to $1,313.04, a savings of $35.95 a month. Dividing the $35.95 into the $4,500 that you paid for the points yields almost 10.5 years to reach a break-even point. In this case, the buydown probably isn’t worth it, especially if you move from that house in five years.

The bottom line is that points are usually not a good investment, as you can see from the numbers above, unless you plan to live in the home for a few years or your qualifying ratios are razor thin.

Dividing the savings achieved by paying points into the cost of the points is the best way to tell if the results are worthwhile. Paying points may only make sense if the breakeven is four years or less and you plan on living in the home a long time.

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