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Chrisman's Corner: A Simple Primer on Mortgage Points

JMAC’s brokers after often asked about mortgage points. How are they calculated? To our experienced brokers they are second nature, but it helps to see an explanation as a reminder.
 
As an example, to better understand this concept take a $200,000 loan with a 30 year fixed rate mortgage. With a 4% fixed mortgage rate with 0 points, the monthly mortgage payment on this loan would reach $955. The zero points means that the consumer would not end up buying down the rate and the loan is priced at par rate. 
 
But in another situation for a JMAC broker, if the consumer wanted to buy down the rate to 3.75 percent with 1 point, the 1 point would be equivalent to a fee of 1 percent of the loan amount. This would cost the consumer $2,000 at closing to buy down the rate for a monthly mortgage payment of $926. Since this monthly payment is $29 less than the loan with zero points, if you divide $29 into $2000 it would take 68.96 months or 5.74 years for the consumer to get their upfront cost back. 
 
If our broker’s client chose to sell the house or refinance less than 5.74 years, they would lose money. If the consumer wanted to walk away with cash, then the borrower can opt for a rebate credit of -2 points, equaling a credit of 2 percent ($4000) of the loan amount at closing. This would raise the interest rate to 4.375 percent and a monthly payment of $998. Since this payment is $43 more than the zero points loans and $4000 less at closing, if you divide $43 into $4,000 it would take 93 months or 7.75 years for the higher interest rate to cost more than the zero points loan. If the consumer sold the house in 5 years, the higher interest rate would cost $2,850 but with the $4,000 rebate, there would be a $1,420 profit.