What are loan amount points and buydowns


A point is simply 1% of the loan amount. It is usually paid in a lump sum when you get your loan. In some cases it may be financed. There are two types of points:

1. discount points, which can directly lower your interest rate; and,

2. origination points.

Example: You want to borrow US Dollars 150,000. One lender offers a no points loan with an interest rate of 6%. Another lender offers a two points loan at 5.5%. By paying the two points, you are buying down the interest rate. Which loan is better?

There are two things you must consider to determine the answer to the problem in the example. First, type “mortgage points” into any search engine. There will be several sites for mortgage calculators. For the example, the monthly payment on a thirty-year loan would be just under US Dollars 50 less per month on the two point 5.5% loan. It would take a little over five years to make the two points loan the better deal. Type in your specific numbers and you will be able to figure out the break-even time for the loan amount and percentages you are comparing.

Now for the harder part. How long will it be before you pay off the loan? Are you planning to move within five years (before the break-even time)? If you plan to move in three years, you would want the no points, 6% loan. If you end up staying in the property seven years, you will save money with the two points, 5.5% loan. While predicting when you will move in the future is no easy task, most people underestimate the time they will keep their property. An advantage to discount points is that they are considered interest and are currently tax deductible. Since tax laws change frequently, always get advice or research current deductions for mortgage expenses before filing.

A buydown over the life of a fifteen- to thirty-year loan will not cause a significant difference in your interest rate. The estimate on a thirty-year loan, for example, is one-eighth of 1%. The buydown is most effective over a short period. If you buy down your interest rate for the first three to five years of your loan, the rate and monthly payment will drop enough that it may mean the difference between qualifying and being rejected.

The second type of point is the origination or commission point. These are lender fees or mortgage broker commissions. They do not lower your interest rate or any other costs of the loan. They are necessary payments for the service that you receive. However, avoiding these fees may not save you money. Paying a fair commission to an honest and competent mortgage broker may be insignificant compared to the money he or she will save you on your mortgage loan.

Since the lender will give more weight to lowering your monthly payment than having some cash in the bank, you can accomplish more by using available cash to buy down the interest rate.

Legal Disclaimer

Our website is not responsible for the information contained by this article. Articleinput.com is a free articles resource thus practically any visitor can submit an article. However if you notice any copyrighted material, please contact us and we will remove the article(s) in discussion right away.

Note: This article was sent to us by: Christian P. Gaster at 04282010

Related Articles

1. What are competing values and how to become financially fit
Competing Values The same value tradeoff is at work when we decide where to spend our limited time. For most of us, when we have finished work, we want to kic...

2. Learn financial management and make the right decisions
Learning Financial Management Can Be Fun Financial management starts with education - whether through taking a formal class, reading a book, or talking to a fin...

3. Buy today pay tomorrow is not doing any good to your finances
Who takes care of your fnancial well-being? Do you pursue happiness through the "things" and "services" you buy? The answer is most likely "yes" for most of us ...

4. Buy only what you need and become financially competent
Searching for What You Really Value You either decided to keep your promise to yourself or to buy the prized item, according to your inner priorities. Did you...

5. Be a savvy consumer and make the right financial choices
Becoming a savvy consumer This is not our parents' (or grandparents') financial marketplace. Only a few decades ago, we were faced with far fewer financial de...

6. Health insurance you can afford if you choose your provider carefully
Health Insurance and Health Care The health insurance industry and our nation's employers are setting themselves up squarely in opposition to the vast fast fo...

7. How to get and keep good credit to balance your financial situation
Getting and keeping good credit Mastering the marketplace includes questions about if, what, and when to buy. Having good credit reflects how we choose to pay...

8. Cash money disappears in the USA while credit grows
Credit Society - Our Way of Life Cash and the use of cash money is slowly disappearing in the USA. It is predicted that before long, our nation will be a "cashles...

9. Scams and frauds you can avoid by staying informed
Staying ahead of scammers and thieves ew scams surface more frequently these days, but attempts to defraud unsuspecting consumers are nothing new. Our greatgran...

10. In the mortgage industry many lenders make loans using mortgages
What is the mortgage industry? There is a long list of the types of lenders that make loans using a mortgage for security. They include government agencies, len...