Yesterday, I talked about Buying Mortgage Points and the potential money that could be saved using this loan structure. I received a comment basically stating that you would be better served by investing the money you would have spent buying mortgage points into something else that would yield a better return on your money. While this is true, yesterday’s post was geared toward buying the points, and then financing those points back into the loan. This is where the real benefit of buying mortgage points pays off. In this scenario, you are not spending any extra cash up front. You are merely restructuring your loan to provide the lowest possible overall cost.
But not only the comment I received on that post, but I also was researching and found that most people who buy mortgage points (and pay for them up front at the closing table) often do not keep there house long enough to reach the break even point, and therefore don’t justify the cost of buying the points. After seeing that, I felt inclined to extend the example I presented yesterday, and give you a formula to find out just how long it will take to “break even” on the cost of buying points. Here’s a quick recap on the example:
PMT on $100,000 at 6.5% = $632.07 (Principle and interest only, based on a 30 year loan)
PMT on $100,000 at 6% = $599.55 (Principle and interest only, based on a 30 year loan with 2 points)
So that is a difference of $32.52 per month. But the 2 points cost you $2,000 at the closing table. Therefore, we can determine how many months, and the corresponding years it will take to recapture the initial $2,000 investment.
$2,000 / $32.52 per month = 61.5 months / 12 months per year = ~5 years
So what that means is that you will need to own your home for at least 5 years just to get back the $2,000 you invested in your home. So if you are considering buying points up front, make sure you plan to stay in your home longer than the break even point. Otherwise, as I suggested before, ask your lender about financing the points back into the loan, and you will start saving money immediately on the loan (in most cases, be sure to follow my calculations and verify the numbers with your lender). If you are wondering how I came up with the payment calculation, just use the PMT function in a spreadsheet program like Excel to determine the payment. Here are the variables I used:
Stay tuned for more great personal finance help and resources to come.