Get the best loan

Step 3: Rate versus fee; understanding points

Do it yourself

Now it’s time to take action! To decide if you should buy points, take the following steps.

Step-by-Step Guide:

  1. Ask for the rate sheet early in the process and save it so you can object if they try to charge you more as you approach closing. Some loan officers are reluctant to give you their rate/point information. In that event, find a more cooperative lender.
  2. Determine your monthly payment without buying points.
  3. Determine your monthly payment if you did buy points.
  4. Subtract the lower payment from the higher payment to determine your monthly savings.
  5. Divide the amount charged for points by the amount of monthly savings to get the number of months in your breakeven period.
  6. Divide the number of months by 12 to get the number of years.
  7. If you plan to stay in your home for longer than the number of years in your breakeven period then buying the points might be a good investment. However, this calculation is only an estimate.
  8. To get a more accurate calculation, use Credit.com’s Mortgage Points Calculator. First, gather the following information and enter it in the calculator as shown in Figure 1 below:
    1. From the Rate Sheet
      1. Lower (or zero) Points Loan Rate and Points
      2. Higher Points Loan Rate and Points
    2. Loan Amount
    3. Loan Term
    4. Savings Rate – the interest rate on your CD’s or savings account
    5. Your Tax Rate – if you don’t know your tax rate use the default 26%
  9. Compare the savings for each loan option indicated by the blue and green lines on the chart. In the image below you can see that the savings are nearly equal after nine years. That is the breakeven point.
  10. Move the red line to the number of years that you intend to stay in the home. Compare the savings for each loan option (in green and blue text above the chart). The best loan option for you is the one with the most savings for the years you will live in the home.

Figure 1: Mortgage Points Calculator

Key takeaways:

  1. One point is 1 percent of the loan amount.
  2. Ask your loan representative to give you their rate sheet. If they refuse, get up, walk out, and find a more cooperative lender, or ask to speak to the boss. Be firm in your resolve to get this information. Keep the rate sheet and make sure nothing has changed when you are locking in your rate.
  3. If you plan to stay in your home for longer than the breakeven period then you should buy points.