A more advanced calculation to figure out the break even point on points purchases also accounts for the difference in loan balances between the various options. The balances on various loan options are repaid at different rates depending on the rate of interest charged and the amount of the loan.
This simplified method unfortnately leaves out the impact of the varying amounts owed on different home loans. So if points cost you $2,000 and saved $40 per month then it would take 50 months to break even (2000/40 = 50). The simple calculation for breaking even on points is to take the cost of the points divided by the difference between monthly payments. If the homeowner does any of the following early in the loan they'll forfeit most of the benefit of points: After some number of years owning the home, the buyer ends up benefiting from the points purchase. The buyer spends thousands of Dollars upfront & then saves some amount like $25, $50 or $100 per month. This means the fee is paid upfront & then savings associated with the points accrue over time. Points are an upfront fee which enables the buyer to obtain a lower rate for the duration of the loan. Breaking Even: Should You Buy Points?īuying points is betting that you are going to stay in your home without altering the loan for many years.
Then compare what other lenders offer at that level.įor example you can compare the best rate offered by each lender at 1 point.įind the most competitive offer at that rate or point level & then see what other lenders offer at the same rate or point level. Some lenders advertise low rates without emphasizing the low rate comes with the associated fee of paying for multiple points.Ī good rule of thumb when shopping for a mortgage is to compare like with like. Net Savings (Interest Savings Less Cost of Points) The following chart compares the point costs and monthly payments for a loan without points with loans using points on a $200,000 mortgage. How do Discount Points Work?Ĭomparing Monthly Mortgage Principal & Interest Payments With Discount PointsĪ home-buyer can pay an upfront fee on their loan to obtain a lower rate. In mortgage rate listing tables it is not uncommon to see a loan with 1.1 discount points.
Some lenders may offer loans with fractional discount points. Discount points can be paid for upfront, or in some cases, rolled into the loan. In most cases 1/4 of a percent is the default for fixed-rate loans.Įach point lowers the APR on the loan by 3/8 of a percent (0.375%), though this discount only applies during the introductory loan period with the teaser-rate.Īs mentioned above, each discount point costs 1% of the amount borrowed. Each point lowers the APR on the loan by 1/8 (0.125%) to 1/4 of a percent (0.25%) for the duration of the loan.
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