When it comes to comparing interest rates for a mortgage loan, homebuyers frequently have the option of choosing a loan with a lower interest rate by paying what is called points. To put it simply, a point is equal to 1% of the loan amount. For example, with a $200,000 loan, one point equals $2,000. Points are typically paid by the buyer at closing.
Although paying points seems beneficial because a lower interest rate means smaller monthly payments, it doesn't always mean it's the right loan for you. The answer to whether or not this is the best loan for you usually depends on how long you plan to stay in the house.
If you are shopping for loan rates on a $150,000 home and your bank has offered you a 30 year loan at 7.5% with no points, this will mean you have a monthly payment of $1,049. If your bank also offers you a loan at 7% if you pay 2 points ($3,000), your monthly payment is lowered to $998, or a savings of $51 every month.
By dividing the amount you will pay for the points ($3,000) by the monthly savings ($51), you will have to own the house for 59 months (just under 5 years) before you will start to see true savings as a result of paying points. If you plan to stay in the house for several years, then paying points could make really good sense for you. However, if there is a possibility you will be moving in less than 5 or 6 years, then you are better off paying the higher interest and no points.
Tina Fountain Realtors, an Atlanta Real Estate company serving the entire metro Atlanta area including Atlanta luxury homes for sale and Sandy Springs homes for sale. We can be reached at 404-842-1555.