What's the Point?


Brian Brady recently suggested that I explain how mortgage interest rates can be priced with or without a discount point since I’m now posting mortgage interest rates on Fridays here at RCG.  

One point is one percent of the loan amount.   Typically, but not always, one point equals 0.25% in interest rate.   You may hear lenders refer to discount points or origination fees…for me, they’re one in the same.   I’m paid eitiher way.  If you’re a buyer shopping rates, look on the Good Faith Estimate for the origination fee and discount points and add them together.   That’s how many points you’re paying to buy that interest rate for a certain period of time.
For example, if a 30 year fixed rate has a rate of 5.75% with paying 1 point, zero points would probably be 6.00%.   Whether or not someone pays for a point should be decided by how soon they will break even on the point as it is a significant cost.   A simple formula to determine when you break even is to divide the difference in payment between the 1 point and the 0 point scenario into the cost of the point paid.   The scenario below is based on a loan amount of $400,000.

Rate:  5.75% based on 1 point = $4,000
Principle and interest payment:   $2,334.29
Monthly savings over the 6% payment at zero points = $63.91
How long to break even on the $4000 = 63 months

Rate:  6.000% based on 0 points = $0
Principle and interest payment:  $2,398.20

If a borrower is planning on living in their home more than 5 years and not refinance during that time, then paying the point may be the right choice.  
A borrower can also have their loan priced to pay their closing costs. 

Rate:  6.125% = 0 points and approx. $2000 in rebate to cover closing costs (a.k.a. the “no cost mortgage

Why Refinance Back into a 30-Year Loan?

One of the biggest reasons homeowners refinance their mortgage is to obtain a lower interest rate and lower monthly payments. By refinancing, the borrower pays off their existing mortgage and replaces it with a new one. This can often be accomplished with a no-points no-fees loan program, which essentially means at “no cost