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The Fees a borrower pays a lender to lower the Interest Rate is known as Mortgage Points. Each Mortgage Point costs one percent of the loan amount and typically one Mortgage Point lowers the Interest rate of the borrower by .25% depending upon the lender. For example, on a 500,000 loan with an Interest Rate of 4.75%, one point would cost the borrower 5000.00 and would reduce the Interest rate to 4.5%. The process is also referred to as a Buy Down or Purchasing Mortgage Points. The buy down interest rate varies by the lender.
The Mortgage Points are paid at closing and are listed on the Loan Estimate (LE) and the Closing Disclosure (CD). Buying Down or Purchasing points may not work for certain borrowers. For example, if you purchase two points at closing and sell the house after three years, a Buy Down may not make sense.
In order to arrive a number for a Break Even point, (to determine how long it would take you to recover the cost of buy down), divide the total amount paid for buy down by the amount saved on the monthly payments to arrive a number for the number of months to break even. Example, if you paid 5000.00 for the buy down and save 60.00 a month, 5000/60= 83 months to break even.
About the Author: Ahsan Bashir is an experienced Tax Consultant based in Irving, Texas, with over 25 years of expertise spanning Taxation, Accounting, Business Lending and Mortgage, Risk Management, Business Insurance, and Business Consulting. Through his firm, Z-Tax & Accounting, he provides comprehensive financial services including Individual and Business Tax Preparation, Bookkeeping, Payroll Processing, and Business Consulting. As an Enrolled Agent authorized to practice before the Internal Revenue Service (IRS), and an IRS Certifying Acceptance Agent (CAA), Ahsan Bashir delivers trusted, professional solutions tailored to the unique needs of both individuals and businesses.
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Related Topics: The Loan Estimate (LE) The Closing Disclsoure (CD) Good Faith Estimate (GFE) Conventional Loans FHA Loans VA Loans USDA Loans A Fixed Rate Mortgage What is an Adjustable rate Mortgage? What are Payment options for an adjustable-rate mortgage? Explain Facts on margin with respect to adjustable-rate mortgages What is "Cash out refinance"?
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