One of the first questions lenders hear from prospective clients is DO YOU CHARGE POINTS? While the meaning behind the question is fair, learning what points are will help you understand an important piece of the mortgage process.
To begin, let’s start with a definition:
Points – Fees paid to or received by the lender, which directly impact your rate, either by lowering or raising it. One point equates to 1% of your loan amount.
Using the above definitions, we can now better understand that points directly affect your mortgage rate. The act of buying points refers to paying fees upfront to secure a lower rate, while selling points is just the opposite. When you sell points, you are accepting a higher rate in return for credit from the lender to cover some or all of your closing costs.
Is buying or selling points right for you? Depends upon your particular situation. Take a look at the example below:
$700,000 Loan Amount
4.25% Standard Rate
$3,443 Monthly Payment
Now let’s take a look at what happens when we buy 1 point (or 1%), which reduces the rate by .25%.
$700,000 Loan Amount
4.00% Standard Rate
$3,341 Monthly Payment
$7,000 Points Charge (1% of loan amount)
$102 Monthly Savings
68 # of months to break even ($7000/$102 = 68)
Does it make sense to buy points in this case? Generally speaking, I would say NO. 5+ years to get your money back is much too long. A similar calculation can be done regarding selling points here to determine if it makes sense, given your situation.
I hope this helps to unravel the mystery surrounding points. Please reach out should you desire any further clarification regarding how points work, or want to walk through your mortgage options with one of our loan officers.
