Whats the Point! (In Paying Points in a Mortgage Transaction)
Q. What is a point and does it make sense for me to pay points to get a lower interest rate when obtaining home financing? A. As a loan officer this is a question I am often asked. All too often in this industry- the answer is- it depends. What does it depend on? It depends on your personal situation and your personal financial goals.Related Item:
What's the Point! (In 'Paying Points' in a Mortgage Transaction)
What's the Point! (In 'Paying Points' in a Mortgage Transaction)By Jennifer Wiatrowski
Q. What is a 'point' and does it make sense for me to 'pay points' to get a lower interest rate when obtaining home financing?
A. As a loan officer, this is a question I am often asked. All too often in this industry- the answer is- it depends. What does it depend on? It depends on your personal situation and your personal financial goals. Let's start with the definition of a 'point.'
1 point in a mortgage transaction is equal to 1% of the loan amount. (Therefore- if your loan amount is $100,000, 1 point would be equal to $1,000.)
Further, the first point in any home finance transaction is called the 'origination fee.' Any subsequent points are referred to as 'discount points.' That is- if you are paying 2 points in association with your mortgage transaction- you should see the first point listed on your Good Faith Estimate as the origination fee and the subsequent, second point listed as the discount point.
Please note: This makes for an interesting 'point' to be made here. (No pun intended. :-) Not all lenders will admit to you that the origination fee is a point- IT IS. You do not have to pay an origination fee in association with taking on home financing. It is OPTIONAL. This is especially important to remember if you are trying to get an apples to apples comparison of fees being charged by different lenders. While one lender may tell you that a rate is based on 2 points (1 origination fee and 1 discount point) another lender may tell you that same rate is based on 1 point alone (only counting the discount point.) Ask if there is an origination fee!
In addition, often when you are looking at interest rates being quoted online- the origination fee is not being counted as a point.
How does 'paying points' work?
Any time that you ask me to quote you an interest rate, I look at the rate sheet that has been issued to me by GMAC for that particular day. There is a rate on that 'rate sheet' that is a true zero point rate. That is, if you choose to go with that interest rate- you will not be paying any points in association with the transaction. However, if you decide that you might like a little bit of a lower interest rate, there is a rate on that sheet that is a 1 point rate. So, if you pay 1 point into the transaction, your quoted interest rate will be slightly lower.
Example: Today's 'true zero' point rate might be 6.5%. However, if you choose to pay 1 point you might be looking at an interest rate of 6.375%. This is strictly just an example. By choosing to 'pay points' you are, in essence, saying to the lender- 'I will pay you 1 point up front, or 1% of the loan amount, to be included in my closing costs. However, in turn you will give me a lower interest rate.'
Does it really pay to 'pay points?'
Here's the scoop. Paying points does not make sense for every buyer in every mortgage transaction. However, paying points allows you to save in one of two ways.
The first way that you save is in your monthly payment. Although not dramatically so, by 'paying points' to in turn get a lower interest rate, your monthly payment will be somewhat lower.
The second way that you save which tends to be a larger savings is over the life of the loan. If you hold your loan to term- that is, say you have a 30 year, fixed rate, loan and you make 360 payments once a month for the life of the loan. The amount of money that you save 'on the back end' will be much more substantial if you have a lower interest rate. In our example with a loan amount of $100,000- you may pay 1 point up front in your closing costs, or $1,000, but over the life of the loan you will save thousands in would have been interest charges.
A Note About National Averages
If you are in the market for a home and will soon be taking on home financing, there is a very good chance that at least some of the time you are watching what is taking place in the market and where mortgage interest rates are currently. Did you ever wonder why it seems that when you look online or watch the news that the national average for a 30 year fixed rate mortgage is so much lower than what you are being quoted? The answer is simple. 'Points!' When lenders submit their current 30 year fixed rate interest rates- some are submitting a true zero point rate. Some are submitting a 1 point rate. Some are submitting a 2 point rate, etc. etc. What the media does not tell you- is the amount of points at which they are quoting their rate! So, you have no real way of knowing the true national average!
There is no doubt that the concept of 'paying points' can be extremely confusing! Please call or e-mail me today with any questions. I would be more than happy to help you figure it out! 570.283.1682.
Jennifer Wiatrowski is a loan officer with GMAC Mortgage in Kingston, Pennsylvania. She encourages all buyers and real estate agents to contact a loan officer who will provide them with honest advice and a solid letter of pre approval. Please e-mail comments to Jennifer.Wiatrowski@gmacm.com
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