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Shopping for Your Loan
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What are mortgage points and
should you pay them?
 Example:
Loan Amount - $100,000
Interest Rate - 6.00%
Term - 30 Years
Principal & Interest Payment -
$599.55
Cost - " 0 "at closing
TOTAL INTEREST PAID
$115,838.19
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Many borrowers are adverse to
paying "points". To some, it's a sinister plot to
extract extra money from the customer, or just an extra
expense.
Here's a down to earth explanation of mortgage discount
points; also known as origination fees. The lender can offer you a lower interest rate
if you are willing to PRE-PAY
some of the interest at closing.
Let’s say the lender wants to earn $100,000 interest
over the life of the loan, so the lender offers you a
ZERO point rate of 6%, and will earn $100,000 over the
life of the loan, or the lender could offer you an
interest rate of 5.75% and one discount point.
A discount point is one percent of the mortgage
loan (i.e. $100,000 X 1% = $1,000). So if
you’re willing to pay $1,000 at closing, you will
receive a lower interest rate . . . because you are
prepaying some of the interest owed on the loan.
Generally speaking, the more points, the lower the
interest rate, because the lender is receiving some of
the interest up front. Needless to say, a lower interest
rate means that the monthly payment will be lower.
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Origination and/or Discount
Point Comparison
 Example:
Loan Amount - $100,000
Interest Rate - 5.75%
Term - 30 Years
Principal & Interest Payment -
$583.57
Cost - $1,000 at closing
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 Example:
Loan Amount - $100,000
Interest Rate - 5.50%
Term - 30 Years
Principal & Interest Payment -
$567.79
Cost - $2,000 at closing
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 Example:
Loan Amount - $100,000
Interest Rate - 5.25%
Term - 30 Years
Principal & Interest Payment -
$552.20
Cost - $3,000 at closing
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Will I save money over the life of the mortgage? |
Example:
Loan Amount - $100,000
Interest Rate - 5.75%
Term - 30 Years
TOTAL INTEREST PAID
$110,086.23 |
Example:
Loan Amount - $100,000
Interest Rate - 5.50%
Term - 30 Years
TOTAL INTEREST PAID
$104,404.04 |
Example:
Loan Amount - $100,000
Interest Rate - 5.25%
Term - 30 Years
TOTAL INTEREST PAID
$98,793.33 |
As you can see, paying origination or discount points can
actually be beneficial. Needless to say, the decision to pay or
not to pay mortgage points is a decision between you and the
lender.
Here's a nice to tool to estimate the
total interest paid on a loan:
Mortgage CalculatorHome Buying Information
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