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Can
Points be Financed? and...should you do it?
The Simple answer is
Yes, you can finance them. The best answer is will this really save you
money? and...why are you financing the points?
The answer to those two questions will lead you to making the right choice.
How Does Financing Points work?
Although Financing points gives you a lower monthly payment, you will have
a higher balance on the mortgage to pay off.
While the result is lower payments, some people finance points in order
to have a lower long term cost and some people finance the points for the
short term goal of the lower payments in order to qualify for a mortgage.
Remember that a mortgage is just a financial instrument and the object is
to use it in a way that costs less over the long run. Over time, you will
pay less for a mortgage when you finance the points, but any time you pay
points, it takes time for that investment to truly be worthwhile.
What do you need to
consider?
Why are you financing the points?
Other reasons for financing the points may also play an important role in the decision. As long as there is the equity available to finance thse points, sometimes the financial rewards of qualifying for a lower payment, or qualifying at all, may be worth
How long will it take you to recover the cost of the Points?
Compare what you will save each month, and over the length of the loan.
The Simple Method
Take the amount you will pay for points, divide this by the savings per month and this will give you the length of time to recover your investment.
Then determine if you intend to stay in the home for that long a period of time.
example: $3,000 of points divided by savings of $50 per month equals 60 months or 5 years to recover the investment.
Can you Invest this Money you save by Financing the Points?
When this is a decision about where to put the money, it is likely better to finance the points and put the money in an investment.
For instance, a borrower who could put that $4,000 in a 401K that returns an average of 10% would have an retirement fund worth nearly $70,000 after 30 years and have saved the $18,000 on the interest charges.
WOW!! Simply by paying financing two points and investing the money, this savvy borrower is $88,000 ahead of the borrower who just took the mortgage and would not listen to options from their mortgage professional.
In fact, this borrower after 4 years would have already recaptured the money and be $500 ahead!
| Money saved each month |
48
x $30.96
|
$1,486.90
|
| Money made on Investment |
$1,856.40
|
|
| Less the higher balance on mortgage |
($2,853.90)
|
|
| Total Savings |
$489.87
|
|
Of course, there are tax implications to this scenario and you would need to check with your accountant before making this decision, but this is something to think long and hard about before paying those points out of your pocket.
Real Numbers Example
Here is an example.
A borrower financing $200,000 on a 30 year fixed-rate mortgage is offered the following choices
| Interest Rate |
Payment
|
Savings
|
| 6.25% on 200,000 |
1231.43
|
-0-
|
| 5.75% on 204,000 |
1190.49
|
30.96 per month |
If you were to keep the loan the entire 30 years, this decision is a no brainer, you pay the points. Over 30 years financing points would save you over $18,000, more than 4 and a half times the $4,000 you would have paid for 2 points.
Here is a comparison of the total interest paid on these two options.
| Interest Rate |
Payment
|
Total
Interest paid
over 30 years |
| 6.25% on 200,000 |
1231.43
|
$243,319.46
|
| 5.75% on 204,000 |
1190.49
|
$224,575.09
|
| Total Savings |
$18,744.37
|
|
Summary
Financing points is a much trickier situation that just paying points and is a harder decision to make.
When you finance points, you really need to be staying in your home for a while.
Of course, if financing the points can give you such a low interest rate that there is a very high likelihood that this is your last refinance, then you should go for it.
If you are looking for a mortgage from a mortgage professional and company that will make you aware of all your choices and help you cooses the best option for you, give me a call or fill out the information request form on the apply now page.
|
Harry
Smith
email Harry@dailyinterest.com or reach me by phone Office 1-248-548-7655 Cell 1-248-514-9000 |
Drew
Smith
email drew@dailyinterest.com or reach me by phone Office 1-248-548-7655 Cell 1-248-703-7770 |
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