In its brochure, ‘Looking for the Best Mortgage – Shop, Compare, Negotiate,’ HUD defines points as ‘fees paid to the lender or broker for the loan and are often linked to the interest rate; usually the more points you pay, the lower the rate.’ One point represents one percent of the mortgage amount.
For example, ABC Home Loans offers two options: 5.25 percent with no points or 5.00 percent with one point. Let’s assume the mortgage amount is $150,000. The term for both options is 30-year fixed.
Option A: The principal and interest payment at 5.25 percent is $828.31.
Option B: The principal and interest payment at 5.00 percent is $805.23. This option will cost you $1,500 (one percent of the mortgage amount) more upfront than option A. You will save $23.08 a month when compared to option A. It will take almost 5 and half years to make up your initial $1,500 investment.
So, here is the question: Is it worth $1,500 upfront to save $23.08 a month? If you plan on being in your home less than five and half years, probably not.
Points are a very personal decision. Many folks prefer to have a lower payment even if it means paying more upfront. Others, however, prefer to pay a little more each month and invest their money elsewhere.
As a consumer, you need to be aware that some lenders will try to add points to increase their profit on the transaction. This may not actually lower your interest rate. Three words will help you be a better informed consumer: shop, shop, shop. When comparing rates, be sure to get quotes within minutes of each other. It’s not uncommon for rates to change throughout the day.
You will have better luck shopping and negotiating competitive rates with local lenders and brokers. Online lenders are notorious for changing rates and points at the last minute.
DHW asks: Do you think points are a worthwhile investment?
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