A point in the lending world is one percent of the loan amount you are taking. You are probably most familiar with this term, though, through different forms of lender advertising.
Lenders let you know that you can get a specific rate by paying a certain number of points, or even for zero points. Mortgage lenders make money in a couple of different ways. One is by charging a higher interest rate.
The higher the rate, the more money lenders make from mortgage investors who wind up purchasing your mortgage. If, however, they price their loans too high, they become less competitive in the marketplace.
The other way mortgage lenders make money is by charging fees or, in our case here, points. They offer you a lower interest rate, getting less money from the end investor but make up for the money they get in points.
So why would you ever consider paying points when taking out a mortgage? The answer is that it may save you money in the long term.
The first question you want to ask yourself is how long you plan on being in the property. The longer you will be there, the more likely the savings.
One point paid will drop your interest rate approximately one-quarter of one percent. Let’s look at a very simple example.
We’ll say that you have a $150,000 loan and you decide to pay one point ($1,500) to reduce your payment by $22 per month.
To see the payback period, your calculation would be $1,500/$22. This tells you that it would take 45 months, or just under four years, to pay back the point you paid for.
Please reach out if I can answer any questions you might have about how points work. I’m here to help, and I’m just a call or email away.