Buying Points on a Mortgage

David · Joined: 19 May 2004 Posts: 754 Location: Atlanta, GA

I was wondering if there is a good formula for determining whether it is worthwhile to buy points on a mortgage (and how many). I know that a point is defined as 1% of the principal of the loan. So if you have a $100,000 loan, one point would cost $1,000. And I know that by buying a point you are buying down the interest rate. What factors should I consider when buting points?

squirrel · Joined: 29 Jul 2004 Posts: 11 Location: Bucharest, Romania

Is this method similar to paying part of the loan in advance of the installments? Or pay more installments at the same time?

David · Joined: 19 May 2004 Posts: 754 Location: Atlanta, GA

Buying a point means the interest rate is reduced. So if current interest rates are 7% and you buy one point, then the mortgage will be financed at a 6% interest rate.

squirrel · Joined: 29 Jul 2004 Posts: 11 Location: Bucharest, Romania

Hmmm... don;t know if this is possible in my country... I have to check!

BECCA9892003 · Joined: 20 Jan 2005 Posts: 400 Location: Altoona, PA

Yes buying points is something you do on a per loan basis..and it all depends on what ysp you want to make also...we usually aim for 2 points on any loan weather it be front or back for our A borrowers and more for sub-prime...

David · Joined: 19 May 2004 Posts: 754 Location: Atlanta, GA

I know a lot of people recommend against buying points, because they feel you could do better things with that money. Do you have any good guidelines someone might use to decide if points are good for them?

(btw, I'll be buying a house later this year, and I may have to make better use of this forum) :lol:

Haplo · Joined: 20 Jan 2005 Posts: 2422 Location: Springfield, IL

It all depends. Most of our money that we make is in the spread, simply because around here *nobody* has money to do anything with. So in order to survive, we very rarely will charge an origination fee, or utilize discount points.

Keep in mind also that discount points are actually the discount *below* par, not just an origination fee labeled as discount so that you can make par and not charge yield.

WilliamTygart · Joined: 21 Jan 2005 Posts: 33 Location: Pacific NW

Great question. I have a program that I used that prints out reports for my clients and looks at the break even point of buying down the rate or even paying less closing costs and accepting a higher rate. It has graphs and charts that allow me to find that exact point in time where the benefits intersect and go a different dirrection.

This is truly where you get the higher end clients in my opinion. I also have variables that allow me to consider tax brackets, doing interest only loans and investing the difference (taking into considration tax) , additional payments, bi weekly payments, and even a higher intitial rate (with less down) and taking the down that you WOULD have used and turning it into an investment.

David · Joined: 19 May 2004 Posts: 754 Location: Atlanta, GA

I'd be interested in learning how complicated the math is when making this calcualtion, William. Being a tech guy, I would be pleased to make a little online program that helps in this computation.