Paying points can be the right move or not
EAGLE COUNTY, Colorado Paying points on a mortgage transaction is not necessarily financially unadvisable. As a matter of fact, I have paid points on some of my own mortgage transactions probably to the dismay of many readers. Lets start with the basics: one point is equal to 1 percent of the loan amount. The point can be used as a means of buying down the interest rate and/or paying the loan officer. Points are calculated into the transactions closing costs. In the case of a refinance, the fee can either be rolled into the new loan amount or paid out of pocket. With a purchase transaction, the fee is generally paid from the buyers funds. However, in some transactions, sellers issue buyers a credit for various reasons, and the points could potentially be paid with these credits.Generally speaking, one point paid up front will reduce an interest rate by .375 percent, more or less. For example, a borrower may structure a loan with an interest rate of 6 percent without points paid or 5.625 percent with one point. Limits are placed on how much a borrower can pay up front in order to reduce the interest rate. A simple mathematical equation, called a break-even analysis, is used to help determine if paying the point is financially advantageous. A break-even analysis divides the cost of the point by the difference in the two monthly payments in order to obtain the number of months necessary to recoup the cost of the point(s) in the monthly payments.Using a $350,000 loan amount and a fully amortized loan, one point is $3,500; a rate of 6 percent would carry a monthly payment of $2,098, and 5.625 percent would be $2,014 per month. The difference is $84 per month and the break-even point is in 41.66 months ($3,500 divided by $84 = 41.66). Determining if the point should be paid up front is not necessarily based solely on the math. The answer depends on a number of factors, such as whether the money or equity is available to pay points, whether the higher monthly payment is realistic, how long the borrower plans to be in the home or mortgage and future financing needs. For the right circumstances, paying points can be quite a savvy financial move. However, the opposite also applies. Nonetheless, loan officers should always discuss and analyze the option with borrowers and clients. William A. DesPortes is a managing member of DesPortes, Selig & Associates, Professional Mortgage Services. He can be reached at 970-926-9393 or firstname.lastname@example.org.
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