Question:
Should I choose a mortgage with no points and pay a higher interest rate, or should I put money toward points to lower the interest rate on a mortgage?
Answer:
Points are costs that a lender charges you when you take out a loan on your home. One point equals 1 percent of the loan amount borrowed (e.g., 1.5 points on a $100,000 loan would equal $1,500). Generally, the more points that you pay up front, the lower the interest rate you will pay on your mortgage loan. This can save you thousands of dollars in interest over the course of the mortgage loan.
If you pay points up front, you want to make sure that you recover the cost while you are still living in your home. If you move before you recover the costs of the points, you really won’t be saving any money. You can determine how many months it will take for you to recover the cost of the points by dividing the amount you pay for points by the amount you save on your mortgage loan. For example, if you pay $1,000 in points up front and you save $40 a month in interest, it will take you 25 months to recover the cost of the points (1,000 divided by 40 equals 25). If you plan on staying in your home for less than 25 months, you will lose money on the points that you paid up front.
Keep in mind that the cost of points is negotiable and is often split between the buyer and seller. Points may also be deductible on your income tax return.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
