Let’s start at the beginning.  When you hear someone talking about mortgage points, they are speaking in reference to “discount points.” In the most basic sense, one point is equal to one percent of the amount you are planning to borrow. So for example, if you were getting a loan for $150,000, then one point would be equal to $1,500.

After that is when it gets tricky, so pay attention. When you purchase points, you are basically making the decision to prepay part of your mortgage interest.  If that doesn’t make sense, look at it this way.  For every point you buy, your lender will offer you a lower interest rate. The actual amount your interest rate will drop can vary, but in most cases its is approximately 1/4 of a percentage point per every discount point you purchased.  Whew.

Here’s an example if you’re still confused.  Let’s say you are borrowing $100,000.  To drop your interest rate by half a percentage point you would need to spend $2000.  In most cases, a lender will let you purchase as many as 4 discount points (if you are so inclined).

But let’s not jump the gun here.  You need to take a few things into consideration before you go to your lender trying to buy as many discount points as possible.

First of all (and just like everything else in this world) the main thing to think about when buying discount points is CAN YOU AFFORD IT? A lot of people (especially first time homebuyers) are pretty strapped for cash when they decide to purchase a new home, and having an extra 5 or 6 thousand dollars laying around for points just isn’t reality.

In fact, even if you had that money laying around, you have to wonder if it would help you out more to spend it elsewhere, such as on home improvements or moving expenses.  You might even yield a higher return from your money if you put it into the stock market or purchased bonds.

Another major issue to consider has to do with how long you plan on living in the house you just purchased (or refinanced). Since buying these points is really just prepaying part of your interest upfront, it might take several years before the money you are saving exceeds the amount you paid upfront for the discount. Obviously, the longer you plan on living at the property, the better deal (and the more money you end up saving) over the life of your loan!

So the key to finding out if buying points is worth it is to calculate the breakeven point, which is when the amount you save each month catches up to the amount you spent on the discount points.  If you move out before this point is reached, the bank ends up winning, and vice versa.

In most cases the breakeven point is reached anywhere between 4 and 6 years after the loan is originated, depending on your interest rate and the amount you paid in points. A quality loan officer should be able to break down the numbers for you and show when the breakeven point is obtainable.

As always, if you have any questions about purchasing discounts points (or anything mortgage related) don’t hesitate to CONTACT US and we will get back to you asap!

- Pate

The truth is, few thing in life can compare to the fun filled adventure that is refinancing your mortgage. Wait, what did I just say? That doesn’t seem quite right.

The truth is, dealing with a refinance can be quite the arduous process, and for the most part, it’s not fun at all. This can be attributed to the abundance of paperwork to fill out, the random lender fees, and the sheer fact that most people don’t like modifying their mortgage to begin with.  But there is a reason so many people subject themselves to these hardships, and there are times when refinancing your mortgage is an extremely smart decision that can save you thousands of dollars over the life of your loan.

You may have heard on the news that interest rates have been hovering around historic lows lately, and because of this, thousands of homeowners have refinanced their mortgage in order to cut their monthly payment. You might be wondering how this works.  Basically, by replacing (refinancing) your old mortgage with a new one (that offers a lower interest rate), you can possibly save  hundreds of dollars per month. Imagine if your monthly mortgage went from $1500 a month to $1200. Wouldn’t it be nice?

In fact, lowering your monthly payment may not be the only situation where a refinance would benefit you. You would also want to consider this if the mortgage you are in is (the dreaded) adjustable rate mortgage.  If you find yourself in this situation,  and interest rates are expected to rise, it would be extremely smart to lock yourself in a lower, fixed rate that will keep you sleeping soundly no matter how high rates may sail. And let me tell you, the sky is the limit.

Another reason a person may be interested in refinancing their mortgage is so they can take cash out of the equity they built up over the years. Instead of just refinancing for the amount they currently owe, they may pull out additional funds to use for improvements on their house, starting a new business, or even putting their kids through college.

Of course though, just like everything else, refinancing a mortgage is not free. It would be nice if it was, but that’s just not the case. While you might catch a break and your lender may help out with some of the charges, it is extremely likely that you will still be looking at several thousand dollars in closing costs to pay for a quality refinance. Obviously you must consider these closing costs when deciding whether or not to follow through with the refinance. The trick is figuring out how long it will take before the lower monthly payments make up for the added fees and closing costs. We call this the “break even” point.  Once this point is met, each month afterward you start seeing the extra cash in your pocket.

The biggest thing to consider in regards to this (if you’re doing the refi to save money) is how long you plan on living in the house, and the difference between your old rate and the new one. Long story short, the bigger the difference in rate and the longer you plan on living there, the quicker you start saving moolah!  Wahoo!

To find out if doing a refinance would be cost effective for you, you need to find out what the break even point would be for your mortgage.  To figure this, simply divide the amount of closing costs by the amount of monthly savings.  For example, if you are saving $300 a month, and your closing costs are $5000, just do the math:

$5000 / $300 = 16.67

Meaning that after a year and 4 months (approximately) you would start seeing the savings.  So if you are planning on living in your house longer than this, a refinance would be beneficial to you!

As always, if you have any questions or comments, or if you are interested in a refinance yourself (and you don’t feel like doing any math), don’t hesitate to CONTACT US. We will evaluate your current situation and let you know if a refinance might work!

- Pate

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