What does you lender mean when speaking about points? Very simply put, a point is 1% of the loan amount. The correlation between points and interest rate is simple. The more points you pay, the lower your rate. The question that we should ask ourselves when negotiating rates and terms with our lender is whether it is in our best interests to pay points and get a lower rate, or settle for a higher rate to avoid points and have lower closing costs.
It is not a very complicated analysis that is needed to determine what is in our best interests, and if our loan officer is listening to our plans and hopes for the property being purchased, or refinanced, suggestions to the structuring of the loan should be forthcoming.
If we consider a simple example of the rates and terms that would be available for the structuring of a loan in the amount of $150,000 on a 30 year amortization it may make my point more clear.
To finance the loan with a rate of 5.875%, one would expect to pay the lender approximately 2 Points. That same loan, without paying any points, would probably be negotiated at a rate of 6.375 %. What does this show us?
The loan at 5.875% would require monthly payments of $882.98 Principle and Interest.
The monthly payments at 6.375%, not paying any points would be $930.86 Principle and Interest.
We can therefore see that the loan with no points costs us ($930.86 - $882.98) $47.88 more per month. The points have cost us ($150,000 x 2%) $3,000.00.
If we divide the cost of the points by the monthly savings in payments ($3,000 divided by $47.88 = 62.6) we see that it will take us over 62 months to earn back the cost of the points we paid for the lower rate. If our intention is to occupy the house for less than 5 years, it seems that we should consider the higher rate, without paying the points.
Bond market factors involved in establishing interest rates do not always give the same results. It is important to always ask our lender what the rate would be if we were willing to pay points, and what it will be if we pay no points. We can then do our own calculations to determine what is in our best interests. If you like, you can contact me, and I will give you a current rate quote, and do the math for your individual situation.
bob@tomasso.com
Bob
Robert P. Tomasso
Licensed Mortgage Broker
Principal Broker
Tomasso Mortgage - Established 1989
A Licensed Correspondent Mortgage Lender
4410 SE 16th Place, Suite #1
Cape Coral, FL 33904
Toll Free(800)531-6739
Office(239)945-4348
Fax (239)945-4162
Serving all of Florida and Tennessee
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