Practice what you learned

Imagine that a friend of yours is trying to decide whether or not to buy points on his mortgage and has asked you for some advice. Decide what you think of his comments and select your response from the options provided – “That’s a good idea” or “That’s a bad idea,” and “I agree” or “I disagree.”

“I’m only working with banks that don’t charge points.”

Correct! That’s a bad idea. There’s no such thing as a lender that doesn’t offer points. Your loan representative might not mention points but that doesn’t mean that they aren’t available. You should insist that they show you their rate sheet and help you decide if you could benefit from buying points.
Incorrect. That’s a bad idea. There’s no such thing as a lender that doesn’t offer points. Your loan representative might not mention points but that doesn’t mean that they aren’t available. You should insist that they show you their rate sheet and help you decide if you could benefit from buying points.

“Points are just an unnecessary fee. I want a loan with no points.”

Correct! That’s a bad idea. You shouldn’t think of points as a fee to avoid. They are a potential benefit that some borrowers should buy. If you plan to stay in your home for more than 3 years you should at least consider buying points.
Incorrect. That’s a bad idea. You shouldn’t think of points as a fee to avoid. They are a potential benefit that some borrowers should buy. If you plan to stay in your home for more than 3 years you should at least consider buying points.

“I asked one lender about points and she told me not to think about that until I have to lock in my rate. I want to understand my options now so I can make the right decision later.”

Correct! That’s a good idea. Virtually all lenders offer several rate-versus-fee alternatives on every loan.  If the lender will not give you the information you need, find a more cooperative lender, or ask to speak to the boss.
Incorrect. That’s a good idea. Virtually all lenders offer several rate-versus-fee alternatives on every loan.  If the lender will not give you the information you need, find a more cooperative lender, or ask to speak to the boss.

”On my $100,000 loan, 1.5 points cost $1,500 and reduces my monthly payment by $16. 1,500/16 = 93.75 so it would take 93.75 months, almost 8 years to break even. I’m not going to stay in my place for more than 7 years so the points couldn’t be a good investment.”

Correct! This is the typical way that loan representatives will calculate the breakeven period, but it’s not entirely accurate, it’s an estimate. An accurate breakeven calculation must include points, monthly payments, the interest earnings on both the points and the monthly payments using the borrower's investment rate, tax savings and less the reduction in the loan balance. It’s better to use Credit.com’s online calculator to help you make your decision about points.
Incorrect. You shouldn’t necessarily agree. This is the typical way that loan representatives will calculate the breakeven period, but it’s not entirely accurate, it’s an estimate. An accurate breakeven calculation must include points, monthly payments, the interest earnings on both the points and the monthly payments using the borrower’s investment rate, tax savings and less the reduction in the loan balance. It’s better to use Credit.com’s online calculator to help you make your decision about points.

What, Why, How Check your understanding

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