How to Decide Between Points & a Rate for a Mortgage

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    • 1). Determine how much your interest rate will be. When you have the terms and conditions of your loan including the amount, term, interest rate and monthly payments you can decide if you want to purchase points or not. If you are comfortable with your payment you may not want to purchase points.

    • 2). Find out how much your interest rate will be reduced by purchasing points. Your interest rate will be lowered .25 percent for every point you purchase according to Investopedia. If your interest rate is 6.75 percent it will be reduced to 6.25 percent if you purchase two points. Usually you can purchase 3 to 4 points according to Bank Rate.

    • 3). Get the amount you will pay in points. If your loan amount is $175,000 and you purchase two points you will pay $3,500 in points, ($175,000 x .02 = $3,500). The longer you remain in your home the more advantageous purchasing points is.

    • 4). Compare your monthly mortgage payment with and without points. Get a mortgage calculator and calculate the figures. For example if you have a 30-year mortgage loan, in the amount of $175,000, with an interest rate of 6.75 percent, your monthly payments will be $1,135.05. If two points are purchased the interest rate decreases to 6.25 percent. The new payment would be $1,077.51.

    • 5). Determine if it is worthwhile to purchase points. You save $57.54 per month if you purchase two points, ($1,135 - $1,077.51) because your payment is lowered. Your up front cost for points is $3,500. Divide your monthly savings into your cost for points. You need to stay in your home 60.82 months to recover the amount of the points. Therefore after 61 months it works to your advantage to purchase the points.

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