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Should I Pay Points

What is a Point?

You may have heard people talk about Points and wonder what they are. In the Mortgage World a Point is 1% of the loan amount. Additionally, there are two types of Points which are Discount and Origination Points. Discount Points are fees paid to reduce the interest rate on the promissory note and Origination Points are fees paid to the lending institution providing the loan.

At IBMSECU, a Discount Point will buy down the interest rate by ¼ percent. As an example, if the current interest rate on a 30 year fixed rate loan of $100,000.00 is 5.00%, paying one (1) Discount Point will reduce the rate to 4.75%. The Discount Point (which is paid upfront) costs $1,000.00 for the reduction in interest rate for the full term of the promissory note.

In considering Discount Points, it is important to think about how long you plan on keeping the loan. The reason to consider the length of time is because the upfront interest or Discount Point will reduce the monthly payment. A quick calculation of the difference in reduced payment divided by the Discount Point’s cost will tell you how many months it will take to recoup the upfront interest and if it is worth buying the Discount Point(s).

In our $100,000.00 loan example at 5.00%, the mortgage principal and interest payment is $536.82. By paying one (1) Discount Point or $1,000.00 on a $100,000.00 loan, the interest rate is reduced to 4.75% making the monthly principal and interest payment $521.65 or $15.17 less each month. By dividing 1,000 by 15.17, we can calculate the number of months it will take for the Discount Point to recoup its cost. In this example, 65.91 months or 5 ½ years is how long it takes to recoup the Discount Point. For every month after 5 ½ years, the Discount Point will save you $15.17 per month.

The total savings over the life of the loan can be calculated using the remainder of the term of the loan from the month the Discount Point was recouped. In our example, there are 24 ½ years or 294 months after the month the Discount Point was recouped. Calculating the total benefit, is as easy as multiplying 15.17 by 294 which is $4,459.98. This calculation assumes you don’t refinance and don’t pay extra payments over the life of the loan.

For more information about Discount Points, contact your knowledgeable Credit Union Mortgage Loan Officers at 800.873.5100, ext. 7722 or mortgage@ibmsecu.org. Additionally, you may wish to contact your tax advisor as Discount Points may be tax deductible and should be considered when doing tax planning.

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