Mortgage Points: What's the difference between taking points and just putting more $$ down?
I’m pretty new to all this crap. If I choose to take a higher number of "mortgage points," I reduce my interest rate. But I have to pay for that at closing, which reduces the amount I can put down. So what’s the difference between paying for "points" and simply putting more cash into the down payment?
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Find a mortgage calculator and poke some numbers into it. Determine for yourself what the best results for you will be. Are you planning on staying 2 years, 10 years, forever?
Generally speaking, paying points is better if you plan on staying for a longer period of time; it will take years for the lower payments to add up to a savings greater than lowering the financed amount. Good luck in your new place.
Paying to "take points" up-front while keep your monthly payment lower throughout the life of the loan. Your real-estate agent should be able to tell you which is the more economically-sensed choice.
Don’t ask your real estate agent for information regarding your mortgage….they aren’t mortgage experts and are just as likley to tell you something that is wrong as they are something that is right.
Mortgage Points can mean alot of things. A "Point" simply means one percent of a loan amount. Whether that one percent is a downpayment, money going to the broker, money used to buy a lower rate, etc. So, get your broker to clarify what they mean when they say, "points."
It sounds like you mean points to buy the rate down. This is never a bad idea…***uming that you have the cash to pay for it. But, you can reach a point of diminishing returns. Usually anything beyond the 2-3% range is out of hand and isn’t going to really benefit you. Never, ever, ever pay "buy down" points on an ARM. The benefit only exists if you stay in that mortgage for several years.
Now, what should you do? Well, it depends on how much cash you have. Its important that you don’t put all your money down. You need reserves…otherwise what are you going to do the first time the washing machine goes up on you? If you can afford to buy the rate down by 2% and you intend to stay in the mortgage for 10+ years before refinancing then do it. It will result in lower payments and less interest paid. Additionally, you can recoup some of the points paid on your taxes.
If you intend to sell the home after 5 years, or think that you will likely refinance sometime in the next few years then don’t pay the points. The upfront fees won’t be recouped.
Think of it this way: Lets say you spend $5000 to buy the rate down and it results in a $100 per month savings. Then it would take you 50 months to recoup the $5000. What if you paid $2000 and saved $75 dollars….that would be a lot less time that you would have to wait to recoup your investment. What if you paid $8000 and saved $110 per month? Thats too much.
So, why not just put the money that you pay towards your point directly towards your downpayment? That would lower your payment, but only about $7 per thousand paid. Thus, in the above scenario putting an additional $2000 down lowers your payment about $14. Putting $8000 down would lower your payment by $56. Thats why you pay the points instead of putting the money down. On the flip side even though putting $8000 down wouldn’t save you money every month it may put you into a new loan bracket where the lender sees less risk in your application. That might make the difference between an OK rate and a great rate. Every scenario is different.
If your broker can’t explain this to you…….stop working with them. Call me!