# Pros and cons of buying points on a mortgage

Many home buyers are averse to paying "points". Some buyers think mortgage points are 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 mortgage lender can offer you a lower interest rate if you are willing to PRE-PAY some interest at closing, called "points".

Let’s say the mortgage lender wants to earn $100,000 interest over the life of the loan, so the loan officer 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 mortgage company is receiving some of the interest up front. Needless to say, a lower interest rate means that the monthly payment will be lower.

## How to calculate mortgage points

Interest Rate: 6.00%

Term: 30-years

Principal & Interest Payment: $599.55

Cost: $0 at closing

TOTAL INTEREST PAID OVER THE LIFE OF THE MORTGAGE

$ 115,838.19

Example: Loan Amount - $100,000 Interest Rate - 5.75% Term - 30-years Principal & Interest Payment - $ 583.57 Cost - $1,000 at closing | Example: Loan Amount - $100,000 Interest Rate - 5.50% Term - 30-years Principal & Interest Payment - $ 567.79 Cost - $2,000 at closing | Example: Loan Amount - $100,000 Interest Rate - 5.25% Term - 30-years Principal & Interest Payment - $ 552.20 Cost - $3,000 at closing |

Should I pay points on a mortgage loan? | ||

Example: Loan Amount - $100,000 Interest Rate - 5.75% Term - 30-years TOTAL INTEREST PAID$ 110,086.23 Savings - $5,751.96 | Example: Loan Amount - $100,000 Interest Rate - 5.50% Term - 30-years TOTAL INTEREST PAID$ 104,404.04 Savings - $11,434.15 | Example: Loan Amount - $100,000 Interest Rate - 5.25% Term - 30-years TOTAL INTEREST PAID$ 98,793.33 Savings - $17,044.86 |

As you can see, paying points can actually save you money over the life of the mortgage. The decision to pay mortgage points is a decision between you and the mortgage company and a good calculator

## Mortgage points can improve your debt to income ratio

Lenders determine the maximum monthly mortgage payment using a formula called debt to income. Buying points can lower the mortgage payment, which in turn can improve your debt to income ratio.

### Frequently Asked Questions About Mortgage Points

**Q. Are mortgage points paid up front?**A. The points are usually paid at closing/settlement for purchase loans. For refinance loans, the points can be financed into the new loan or paid in cash.

**Q. Are mortgage points part of closing costs?**A. Yes

**Q. Can the lender pay your discount point(s)?**A. YES! Mortgage lenders are permitted by the loan programs to buy down your interest rate. Lender paid discount points is an easy way to lower your interest rate, provided you can find
a willing lender.

**Q. Can the seller can pay your discount points?**A. YES! The mortgage programs (i.e.,FHA, VA, USDA& conventional) permit the seller to pay a percentage of the buyer's closing costs, including discount points (seller assist).
Here's how discount points can reduce your monthly mortgage payment even though the mortgage amount is HIGHER! In this example, the home is offered for sale at $103,000. We'll ignore the down payment for simplicity and assume your are able to
obtain 100% financing (no down payment mortgage). If the seller is willing to sell you the house for $100,000 and you obtain a no point loan at 5%, your monthly payment for a 30-year-fixed-rate term is $536.82 (principal and interest).
But if you make a full-price offer and ask the seller to pay 3 points. The discount points lowers your interest rate and consequently brings down you monthly payment.

Interest Rate | 5.00% | 4.25% |
---|---|---|

Term | 30 | 30 |

Mortgage Amount | 100,000 | 103,000 |

Payment | 536.82 | 506.70 |

**Q. How many points can you buy down on a mortgage?**A. There is no mortgage-point limit, however, the impact of mortgage points on the interest rate tends to deteriorate after 3 to four discount points.

**Did you know that there is a limit on the amount of points you can pay?**

Fannie Mae mandates a four-year waiting time from the date of the deed-in-lieu of foreclosure, pre-foreclosure sale, or charge-off as recorded on the borrower's credit report or other papers.

A two-year waiting period is allowed if exceptional circumstances can be proven.

Foreclosures may take up to 7 years to become eligible for a conventional loan; however, exceptional circumstances can shorten the waiting period to 3 years, but only if a 10% down payment is made on a primary home.

If a lender offers a "Qualified Mortgage," what does it mean?

Only Qualified Mortgages are subject to the Consumer Financial Protection Bureau's (CFPB) point and charge cap.

Because lenders aren't obligated to issue Qualified Mortgages, they may charge greater points and fees if they want to.

To ensure that borrowers don't pay excessive costs, a lender may only charge the following upfront points and expenses when making a

Qualified Mortgage:

Qualified Mortgage:

- For a loan of $100,000 or more, the down payment must be no more than 3% of the entire loan amount.
- For a loan of $60,000 to $100,000: $3,000 or less.
- For a loan of $20,000 to $60,000, the down payment must be no more than 5% of the entire loan amount.
- For a loan of $12,500 to $20,000, the amount must be less than $1,000.
- For a loan of less than $12,500, 8% of the entire loan amount is required.

## Shopping for the lowest interest rate

Be careful when calling around for the "lowest interest rate". Some lenders will give you an unbelievable interest rate, but not tell you that there are discount points associated with the quoted rate, or the interest rate is not guaranteed.