Lender Outlook - May 2022

Lender Outlook - May 2022

Over the last six months, interest rates have risen sharply. We’re often asked if paying points to lower the interest rate is a good idea.

What are points?

Mortgage Points are fees that the borrower can pay in order to lower the interest rate. One point is 1% of the loan amount and generally reduces the interest rate by .25%. With a loan amount of $300,000, 1% would cost $3,000 and if the interest rate was 5%, it would be reduced to 4.75% by paying points.

For a $300,000 loan amount at a 30-year fixed rate mortgage, below is a breakdown of how much interest the borrower would pay over the 30-year life of the loan. And, the difference in monthly payment.

  Interest Rate

5%

4.75%

  Points 0 1
  Points ($) - $3,000
  Total interest over life of loan $279,769.69 $263,380.12
  Principal and interest payment $1,610.46 $1,564.94

Breakeven Point

To see if paying points makes sense for our clients, we look at the breakeven point of the cost, and how long it will take a recoup the cost from the savings of the monthly payment.

In this example, it would take nearly 5.5 years to break even.

The difference in monthly payment between 5% and 4.75% is $45.52 per month.

$3000/ $45.52 = 66 months or 5.5 years

If our clients plan to sell their home or refinance before the breakeven point, it does not make sense to buy points.

In our area, the lifespan of a mortgage is likely less than 5 years due to the transient nature. But for our clients that plan to stay in the home longer and where interest rates are not expected to drop, it can be a good idea.


Information provided by:

Theresa Cummins and Jess Cummins | NMLS# 136530 and #1087101
Mortgage Source PA, LLC | NMLS #995096
State College, PA 16801
www.MortgageSourcePA.com

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