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FYI
Should
I Pay Points?
At Corridor Mortgage Group we can offer our customers what is called "Par Pricing." This is an interest rate for a particular loan product in which no points are charged. Because the markets are always changing, this interest rate will vary from day to day, and sometimes hour by hour, depending on the volatility of the market.
If you, the customer, want a reduction in the interest rate, we can offer that to you by charging a "Discount" Point.
Calculating Points
One "Point" represents one percent (1.000%) of the loan amount. For example:
- 1 point on a $100,000 loan is $1,000.
- 2 points on a $150,000 loan is $3,000.
- 1/8 point = 0.125%
- 1/4 point = 0.250%
- 3/8 point = 0.375%
- etc.
Simple Rule Of Thumb
Here is a general rule of thumb for quickly determining whether or not to pay points:
- If you plan to stay in the house less than 3 years ? do not pay points.
- If you plan to stay in the house more than 5 years ? pay 1-2 points.
- If you plan to stay in the house between 3-5 years ? it makes no difference.
Break Even Analysis
For those who want to be more precise, you will want to perform a "break-even" analysis. That is, calculate the cost of the points. Then, calculate the cost of the monthly savings as a result of a lower interest rate. Finally, divide the cost of the points by the monthly savings to arrive at the number of months before you "break-even."
An Example
You are deciding on whether to go with a 7.5% 30-year fixed mortgage for $100,000 with no points or a 7.25% for the same loan but paying 1 point.
The monthly payment for the 7.5% rate = $690
The monthly payment for the 7.25% rate = $682
The monthly savings = $8
One Point (1.000%) of a loan of $100,000 = $1,000
Break even Point = Cost of 1 Point ($1,000) divided by monthly savings ($8.00)
1000/8 = 125 months
Thus, in this example, the break even period is over 10 years. If you plan to move before that time, it does not make sense to pay the extra point to get a lower rate.
The loan officers at Corridor Mortgage Group will be happy to sit down with you and analyze your situation to help find the solution that works best for you.
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