You’ve probably heard about “points” when it comes to real estate and mortgages, but do you really know what they are?
What is the point about points, anyway? Simply said, the point about points is to reduce the overall payment on your real estate purchase.
Everybody loves a sale, right?
What moves you to rush to the store or click “send to cart” for a pair of shoes? Is it a 10% discount? 20%? Well, a house or building is a lot more expensive than a pair of oxfords, with or without tassels, so the discount you get with points is more likely to hoover around 2%, but hey! Savings are savings and when you’re talking hundreds of thousands of dollars as a purchase price, a 2% savings can go towards a closetful of oxfords, loafers, brogues, and more!
Mortgage points are fees a buyer pays to the mortgage lender to reduce the interest rate on the loan.
You’re essentially “buying down the rate.” Since each point you buy costs 1 percent of the mortgage amount, one point on a $500,000 mortgage would cost $5,000.
For the most part, each point lowers the rate by 0.25 percent, so one point would lower a mortgage rate of 4.00 percent to 3.75 percent for the life of the loan. Don’t want to buy a whole point? No problem! You can buy fractions of a point. Buy up a half-point on a $300,000 mortgage at a cost of $1,500 and you’ve lowered your mortgage rate by about 0.125 percent.
If the math is starting to give you a headache, don’t worry!
There are handy dandy online discount points calculators available online to help you out. Putting 20% down on a $350,000 home? Great! Expect to live there for ten years? Fabulous! Want to know if it’s advantageous to you to buy some points? Me, too! Let’s say your interest rate is 5% with 0 points. Using the online calculator you can easily see if purchasing 2 points and reducing your interest to 4.5% is worth your while. Presto chango! It is! Over ten years, paying for 2 points will cost you $8,033 LESS than having no points.
So if you can swing it, points can save you some green. You pay for your points at closing. It’s essentially pre-paying some of the interest costs. It can get kinda dicey, though. Can you afford to pay for points on top of your down payment and closing costs? If you have an adjustable rate mortgage, will you be refinancing before your points savings have paid for their cost? Could the money you would pay towards points be better invested elsewhere, say in the stock market or for your kid’s braces? For most homeowners reducing the monthly payment outweighs makes points worthwhile—who knows? You may be able to pay your mortgage off early— but you’ll want to spend some time considering your different options.
Purchasing a home or an office is a big deal.
You need a professional by your side who can steer you through the process and connect you with the talent and resources you need to make sure you get the most bang for your buck. That’s where I come in. I’m Stephen Burchard, The Desert Bowtie Realtor, taking the (k)nots out of real estate.