When loans are quoted by lenders, most buyers pay attention to the interest rate but not so much to the points that may be charged along with the rate.
A point is one-percent of the mortgage amount and considered pre-paid interest that affects the yield on the loan. Buyers or sellers can pay points but there can be limits based on underwriting guidelines for different types of loans.
A lower note-rate would obviously make the payments less. However, with a little analysis, you can determine how much points paid up-front can save a borrower or whether you'll recapture the additional costs in the anticipated time in the home.
In the example below, two choices are compared; a 4.25% loan with no points vs. a 4.00% loan with one point. If the buyer stays in the home at least 69 months, he will recover the $2,700 cost for the point on the lower interest rate.
If the purchaser stays ten years, he’ll save two thousand dollars over the cost of the point. A less obvious advantage will be realized because the unpaid balance on the lower interest rate loan will results in an additional $1,780 savings.
This is an example of a permanent buy-down but temporary buy-downs are also available. A trusted mortgage advisor can help you determine alternatives.
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