Should You Pay Points for a Lower Mortgage Rate in Knoxville

Mortgage and Lending with Van Dyk Mortgage NMLS:98535,Corp 3035


Paying fees up front to lower your interest rate and monthly payment might sound like a bright idea, and even look good on paper… But are they really worth it

For some Knoxville home buyers , it could be, but for others, not so much. This is why it can be a rather confusing topic for many looking for a good deal on their home loan.

If you really want to know if paying fees is a good deal for your particular situation, you need to calculate what your overall savings will be for the life of the loan considering on how long you intend live in your home. If you’re only going to live in your home for a short time, for example, then you might not have enough time to recoup the cost of cost savings when compared to how much you paid up front for the reduced mortgage loan interest rate. On the other hand, if you plan on being in your home for years to come, then the upfront fees may be worth it if you end up saving more than you paid in the long term.

To help you understand points and fees better, below is an example and a list of Q&As

To determine if paying fees for points makes sense for your situation, please don’t hesitate to give me a call or leave a note below.

Q. What is a “Point” in  MortgageTerminology?

A. One “point” = 1% of your loan amount. Therefore, one point on a $150,000 loan would be $1,500. The problem is that in most cases the reduction in interest rate is not enough to offset  the amount of prepaid interest (discount points and origination fee) charged by the lender.

Q: Paying Points Or Origination Fees Makes The Rate Lower, Does thatThat Is A Better Deal ?

A: Not in most cases. Often people lose money and are not aware. To correctly assess the possibility that paying points will benefit you, you must first know;

a) The minimum amount of time that you are sure you will live in the home

b) The cost of the points in dollars

c) The cost difference between payments when paying points and not paying points.

Assume you have been quoted 6.25% with No Points and No Origination Fees, and you see another quote for 6.00% with a One Point Origination Fee.

Your loan amount is going to be $ 150,000.00 for 360 months or 30 Years.

Which one makes the most sense?

Start by answering the questions listed above:

a)  How long will you stay in the home?  stay in the home (3 Years min.)

b) The actual cost of the points in dollars (One point = 1.00% which equals $1,500.00)

c) The cost difference between payments when paying points and not paying points.

6.25% No Points = $923.56/month

6.00% One Point = $899.33/month

It looks like you will save $24.23 each month by paying the Origination Fee.

But you paid $1,500.00 for that lower rate, so how do you account for that?

Divide the cost of the discount,  $1,500.00 and divide it by the monthly savings, $24.23.

Result = 61.90 months

This tells you that you must stay in the home for at least 62 months (5 years and 2 months) in order to  break even.

Q: What if you have to move in 3 years? What happens to those savings?

A: In this case, you actually lose money by paying discount points. This is why it is so critical to work with a lender that asks the right questions, and is committed to always giving you the best advice  and  not try to “sell” you on a rate or program.

Let Me Know How My Team Can Assist You

  • Email me:
  • Give me a call to explore your loan options over the phone calling toll-free 866-435-6553

Apply on-line by completing our convenient on-line loan information form.

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Kathy Stoltman
Rockwood Realty - Ventura, CA
Ventura County Real Estate Consultant 805-746-1793

Thanks Bill, this is a really good illustration of mortgage points and fees.  I know most buyers do not know how to look at this question of should I or should I not pay down the points and this explaination will certainly help them.

May 21, 2012 09:39 AM #1
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