September 1st, 2007 by Michael Oliver

Share This Post

“Paying Points” when buying a mortgage is one of the least understood and most confusing parts of buying a house and deciding what loan to get. Here’s a simple description of what “paying points” (sometimes refered to “buying points”) is. When you are obtaining a mortgage, a rate is assigned for that type of mortgage. The rate varies from day to day according to fluctuations in the markets. We will use the example of a 30 year fixed (the most common loan for residential purposes). Lets say the loan officer qualifies you for a rate of 6.5% over 30 years fixed for a loan amount of $250,000. The payment for that loan (mortgage) would be $1580/month (interest and principle). Taxes and insurance are not included in this example. You would like to get the payment a little lower, as it is more comfortable for you to pay closer to 1500/month. So you have two choices: 1) you could put more money down, which would cost roughly $10,000, making your loan amount $240,000; or 2) you could “buy points” to “buy the interest rate down.” One “point” is equal to 1% of the LOAN AMOUNT — not purchase price. Now, if you’re still with me hang on. This is where people get confused. Because every loan is unique, and this example is for just the absolute average loan, your results will vary. OK, back to the current example. If your quoted rate is 6.5%, to get a $1500/mo mortgage payment you will need to bring that down to a rate of 6.0% (brings the payment in at $1498/month). To get that rate you will need to “buy it down.” On average, buying a “point” or 1% of the loan amount will reduce your rate roughly 0.125%-0.5%. Let’s use 0.25% as the example. So you will need to pay 4 points or $10,000 to buy the rate down to 6%. Now you may be asking yourself why you would want to pay 10k to buy points when you could just reduce the loan amount 10k and be at the same payment. Here’s the answer: The 0.5% extra you will be paying on 240K loan amount will be for over 30 years. On average, that’s an additional $1200 a year in interest! Over 30 years, it’s in excess of $36,000 over the life of the loan vs. the 6% with the loan amount of $250,000. That’s a grand total of roughly $26,000 over the life of the loan! $10,000 (cost of points) and $36,000 (additional interest paid over 30 years) = $26,000 in total savings. Now all these numbers presume you live in the property for 30 years. The vast majority of buyers don’t, so if you’re wondering, it would take about 10 years before your “buying points” would start to save you money over taking the 10k and applying it to the loan amount. As you can tell, this is a very complex situation when getting a loan or buying a home and every situation is completely different. Your real estate agent and loan officer should be consulted when deciding whether “buying points” is a good option for you. I do provide on my website at www.SellingTucsonRealEstate.com many financial calculators in the “financing” section (top left side) which can help tremendously to show exact figures for you.