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A point is defined as 1% of the loan amount. 1 point on a $200,000 mortgage is $2000.00. Simple, huh?
Now when speaking of mortgages, there are two types of points, origination points and discount points. Origination points are paid to the bank, lender, broker, whoever and that is a fee of theirs, money to them for doing the loan.
Now a discount point is used to "buy down" the rate, or get a lower rate. For example, if rates are going at 5.5%, you might be able to pay 1/2 a point to "buy" the rate down to 5.25%. How much it costs to buy a rate down fluctuates daily, so the above is just a "for instance".
When deciding if you want to pay for discount points you need to consider how long you're going to hold onto the property, and how long you think it will take to pay off the mortgage.
For instance, if you can qualify for a $100,000 mortgage of 30 yrs fixed, at 6% your monthly payment (principal and interest) is $596.57. If you pay down two points to lower your rate by 0.5% your new payment will be $565.20, saving you $31.37/month.
Those two points cost you $2,000 up front, but give you a monthly savings of $31.37. If you don't consider inflation or deflation, then it will take you 64 payments to recoup your $2,000 in points. Therefore if you plan to own the house for over 5 Years and 4 months without completely paying off the mortgage, it's a good decision to pay the points. If you think that you'll sell before 5 years and 4 months or pay off the mortgage faster, the points aren't worth the fee.
I wouldn't get them b/c I'm getting a good rate. I was just curious b/c I keep hearing people on here talk about them. Thanks!
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