How to Refinance a Mortgage

What is a “Point” and should you consider paying points for your new mortgage loan? Points come in two varieties; however, for both types, one point is one percent of your loan amount. Suppose you were borrowing $200,000 with your mortgage loan, one point in this case would be $2,000. The two types of points are “origination” points paid to the Mortgage Company or broker that originates your loan, and “discount” points you pay in exchange for a lower mortgage rate or better loan terms.

Point Mortgage Help: Should You Consider Paying Discount Points?

Discount points can lower your mortgage interest rate. Whether or not you should pay the points depends on your situation. Generally speaking, paying your lender one point will lower your mortgage interest rate by .25%. In order for this fee to be advantageous you need to recoup the expense from your lower payment amount. The longer you plan on staying in your home, the mortgage advantageous discounts points can be because you have more time to recoup the expense.

You can calculate the break even point by dividing the amount you are paying in points by the amount you save each month with a lower mortgage payment. This break even point is the number of months it will take you to recoup the expense before you realize any savings. Suppose you borrow the $200,000 from our previous example, with a zero point mortgage you might qualify for a 7% mortgage interest rate. Pay two points for the same mortgage and you would qualify for an interest rate of 6.5%. The difference in your monthly payment is $1,330 at 7.0% and $1,264 at 6.5%. Paying two points will cost you $2,000 and save you $66 per month. It will take 30 months to realize a savings in this example.

Point Mortgage Help: How Much Should You Pay For Origination Points?

Origination points should never be more than 1-1.5% of the loan amount for a home you will occupy. If you are financing an investment property, reasonable origination fees should not exceed 2-2.5% of the mortgage amount. If your mortgage company is asking for a higher amount you should question your loan representative as to the validity of this fee. You can learn more about your mortgage options, including expensive mistakes you need to avoid with our free, six part mortgage tutorial.