What the Heck are Loan Points?

January 5th, 2008

As interest rates go up, more and more Buyers are choosing to pay points to obtain their chosen loans. You may be asking, What the heck are loan points and why would I pay them? Points equate to a fee by the lender. 1 point = 1%. When you pay a point on a loan it can be for many reasons.

The primary reason to pay points would be to “buy down” your annual percentage interest rate or APR. EXAMPLE: You may be able to obtain a $500k loan with a fixed 6.85% APR fixed for 30 years.

If you decide to pay a point (1% of $500k = $5,000) when you get the loan the bank might give you that same loan at a lower 6.5% APR. That small difference in APR calculates to a monthly interest savings of roughly $145. If you had paid 1 point ($5000) at loan inception and it saves you $145 a month in interest, you will come out financially ahead on every mortgage payment after your 34th payment. ($5000 (1 point) divided by $145 (the monthly savings) = 34) This is what we call the “Recapture Rate.”

If you do not plan on keeping the loan beyond the Recapture Rate time period you may be better off NOT paying the point up front. If you think you’ve found HOME and are planning on staying put for a while then paying a point up front can mean a substantial interest savings over the long run.

If you have loan questions call your mortgage representative or drop me a line.

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