Paying Points
I am trying to obtain a loan to purchase a duplex that a broker found for me. He advised me that I have to pay 2points. My question is how much does each point cost.
Loan amt: $50,000
I dont know if this is enough information but please respond any response is helpful thank you
God Bless
double post sorry[ Edited by cherdwelth on Date 07/08/2006 ]
A point is 1% of the loan amount. Two points will be $1000.
For these two points, you should be buying down your mortgage interest rate at least one half point. Ask the mortgage broker what the loan interest rate would be with no points. if the difference in interest rates is at least one half point, you will usually come out ahead for a property you plan to hold.
Paying points is usually more expensive in the long run if you plan to flip the property, especially so if the loan has a prepayment penalty.
Newkid,
Is that one-half percent in interest rate reduction per 1 point paid, or per the two points paid.
I.E. If they paid the $1000 (2 points) but only had a .5% drop in interest rate, would it still be worth it?
Thanks.
JS.
NewKidInTown3 remember that one must also take into account the discount rate
Thank you all for the nice information, I forgot to ask the Broker yesterday when I spoke to him so I turned to the Greastest people in the Business for the answers....TCI!
Quote:Is that one-half percent in interest rate reduction per 1 point paid, or per the two points paid.
I.E. If they paid the $1000 (2 points) but only had a .5% drop in interest rate, would it still be worth it? smithj2,
"Points" are an amount of money you pay to reduce the interest rate on your loan. One point is 1% of the amount you are borrowing. If the mortgage interest rate is high, the points will probably be low, or even zero points. If the interest rate is low, the points will probably be high. The range of points paid to get a mortgage is usually zero to 3. Here again, there are no free lunches. You simply have to decide whether you want to pay the points up front, and have lower monthly payments, or not pay the points and have a higher monthly payment. If you are having trouble qualifying for the amount of money you want to borrow, and just happen to have a few thousand dollars free, you might elect to pay some points to get a lower interest rate so you can qualify for a larger mortgage.
Typically, each discount point you pay reduces the interest rate on a 30-year fixed rate mortgage by about 1/8%. Discounting the interest rate from 6 1/2% to 6 3/8% only reduces the monthly payment on a $50K loan by $4.10.
At that rate, it will take 10 years and two months to just break even over the no discount point loan. After you reach the breakeven point, how much the discounted loan saves you depends upon how much longer you hold the property.
To really have much impact, paying two points to get your interest rate discounted by at least 1/2 point will get your breakeven point to 61.5 months. After that, how much you come out ahead by paying the loan discount points depends upon how much longer you plan to hold the property.
Quote:NewKidInTown3 remember that one must also take into account the discount rate roboxking,
Is the discount rate something other than the interest rate discount we are discussing?
steady28,
You need to ask your broker what the points are for.
They may be to buy down the interest rate, as indicated by other responses. Or, they may be a loan origination fee.
Many brokers don’t even want to do a $50k loan. So, they may just be the brokers’ fee.
Just ask them.