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Old 08-23-2007, 08:36 AM
 
49 posts, read 246,051 times
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I see a lot about "points" and it's probably a dumb question but I have no idea what it means!!! I think that from what I see it's better NOT to have them....? How do points come into play in an 80/20 mortgage? Thanks so much! This board is great considering I am completely clueless!
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Old 08-23-2007, 09:51 AM
 
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Points are essentially prepaid interest. If you plan to stay in your house for a longer period of time, they are usually good to get, but if you plan to sell within a few years they aren't that good.

Here is an article along with a calculator to determine what works best for you:

Mortgage Basics, Ch. 3: Discount points, origination points and your mortgage
Should you pay points or take a higher interest?
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Old 08-23-2007, 10:10 AM
 
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Wow, so very helpful, thanks!
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Old 08-23-2007, 11:14 AM
 
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also, many relocation packages will include points. So some buyers will use them to get better rates when they don't technically make sense.
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Old 08-23-2007, 12:40 PM
 
Location: Swamps of Florida
3,412 posts, read 8,909,125 times
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Simply stated, points are buying down your interest rate. 1 point means 1%
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Old 08-23-2007, 02:19 PM
 
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Quote:
Originally Posted by ShepsMom View Post
Simply stated, points are buying down your interest rate. 1 point means 1%
Just for clarification, 1 point means 1% of the loan amount, not 1 percentage point on your interest rate - it's usually lowered by 0.25% for each point.
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Old 08-23-2007, 02:40 PM
 
Location: Swamps of Florida
3,412 posts, read 8,909,125 times
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Quote:
Originally Posted by Stockholmaren View Post
Just for clarification, 1 point means 1% of the loan amount, not 1 percentage point on your interest rate - it's usually lowered by 0.25% for each point.
I can't never say it right, can i? LOLOL!!
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Old 08-23-2007, 06:39 PM
 
Location: Beautiful East TN!!
7,281 posts, read 18,496,333 times
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Quote:
Originally Posted by DGDurmie View Post
I see a lot about "points" and it's probably a dumb question but I have no idea what it means!!! I think that from what I see it's better NOT to have them....? How do points come into play in an 80/20 mortgage? Thanks so much! This board is great considering I am completely clueless!
I understand your confusion. Getting a mortgage is not an easy thing and like a lot of other things in this world (law, medical, technology) the industry has it's own language and terminology. When you are in need of a mortgage, be sure to work with a loan officer/broker/banker who will take the time you are paying them for to explain EVERYTHING to you. Sometimes it is every easy to get wrapped up in the process of buying the house and "get it to close" and forget that is just one step in owning a home and having the responsibility of the mortgage that will last for years. Buying a home is the largest financial and life changing transaction (for first time home buyers), you should understand everything and feel comfortable with it.
As for "what is points" the others here for the most part answered you but again, what is the context you are asking about? Are you asking about origination points? Discount points? As for a general answer, points are percentages of the loan amount.
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Old 08-25-2007, 05:09 AM
 
Location: Lehigh Valley
1,030 posts, read 3,754,834 times
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Quote:
Originally Posted by ShepsMom View Post
Simply stated, points are buying down your interest rate. 1 point means 1%
Incorrect - 1 point costs approx. 1% of your loan ammount and buys your rate down .25%.
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Old 08-25-2007, 12:25 PM
 
Location: California
510 posts, read 2,941,776 times
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Quote:
Originally Posted by KristyLiz View Post
Incorrect - 1 point costs approx. 1% of your loan ammount and buys your rate down .25%.
So many comments, all on a similar point (yes I meant to say point )

First, the links above will help explain things quite well.

There are two types of points charged on a loan, and they are not always called points. They do not have to be noted in a %, they can simply be noted in a monetary value... if that happens you will have to do the math yourself.

The first is an origination point, or origination charge. The lender/broker/bank charges this for their cost to you of doing the loan. Some will bend things and make it look like a discount point. Your final settlement statement will show who is getting what money...this will be your determination.

The second is a true discount point, or discount charge. This is used to buy down your rate lower than what is offered. There is no set amount for how much your rate goes down. It varies from lender to lender.

On average Sub Prime lenders will drop your rate .5%-.35% by paying 1 point. Typically Sub Prime only allows a 2 point buy down max. The second point typically will not buy your rate down as much as the first point.

On average a buy down point for A paper lenders will buy your rate down by .5%-.125%, depending on where your rate starts. You can often pay as much as 5 points to buy your rate down, but at a certain point it becomes illogical. The lender creates what is essentially an invisible floor rate. A rate they don't want you to go below, but if you do they will make a TON of money by letting you do so. So for example, it could cost you 2 points to get to a 5.75% rate, but getting to a 5.625% rate could cost you an additional 2 points, totally 4 points. Paying 2 points for a reduction of rate by .125% of course doesn't make any sense... so there's the invisible floor rate.

Points are best paid for long term loans, as you can save money over the long run. I know the links posted in this thread have calculators, but here's a way to figure it out for yourself to see if it makes sense.

Let's just say the loan amount is $100,000 and you're paying 1 point to get a 6.5% rate.

First you need to know how to calculate an interest only payment (just the interest paid monthly, ignoring any principal). You take the loan amount X the interest rate and divide by 12. ($100,000 X 6.5% / 12 = $541.67)

Next you need to know how to figure out what a point costs or percentage point. Loan amount X percentage point ($100,000 X 1% = $1,000)

Ok, now that math class is over...here's how you figure it out. You have your base rate, and base points... now let's see if something can benefit you.

If you can pay 2 points instead of 1 you can buy your rate down to 6.25% (a .25% reduction in rate for an additional point.)

So now lets figure out how much interest that .25% will save you. $100,000 X .25% / 12 = $20.83 , and one additional point costs you ($100,000 X 1% = ) $1,000. Now you simply divide $1,000 by $20.83 (your monthly interest charge) and you come up with 48.01. So it will take you 48 months to recover that initial investment of $1,000 to lower your rate.

If you were doing a 3 or 5 year fixed loan, then the above example wouldn't make sense to do. Because you'd probably lose money over the long run... granted you save a little if you happen to stay in the full 5 years on the 5 year fixed. Now, if you did a 30 year fixed, and expected to be in your house a full 10 years... well now paying discount points totally makes sense.

The really smart person would take that payment savings and put it into an IRA, or some sort of investment, or you could pay the money towards principal and pay your loan off faster.

This post is getting quite large... so I best stop now. Feel free to post any questions this post has created in your mind, or if you have any actual situations you have a question about.

-Jeff
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