 Sam
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 Posted: Fri Mar 26, 2004 4:22 am Post subject: How do borrowers get benefited when lenders finance points? |
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Lenders often finance the discount points thereby adding the cash to your loan amount. Therefore, you get a higher loan amount but a lower rate of interest for accepting points. But financing points benefits you only when you carry out the deal for a sufficient time period. That is, if you pay off the loan within a short time, you will not benefit from the lower monthly payments since you will have to pay off a larger loan balance due to addition of points.
Suppose, you are offered a 30 year fixed rate mortgage with 6% interest rate along with 5 points. You have the alternative to repay the mortgage loan with 7% and no points. The loan amount being $200,000, you will have to pay $1330 as monthly installment with a rate of 7%. But if you have paid 5 points on the 6% loan, the loan amount increases to $210,000 with the monthly payment being $1199. Therefore, with such a mortgage you can save $133 on a monthly basis when the lender finances your points.
You may save several months of interest when your points are financed but this depends on the break-even period. The break-even period includes the time frame for which you should retain the mortgage with points so that your benefit surpasses the cost. The shorter the break-even period, the better it is for you as you can save more from the low rate loan.
Financing the points does not require you to pay any other costs during the break-even period. Even if your points are financed and you have taken a loan amount below $300,700, then your loan amount cannot exceed $300,700. This is because the $300,700 limit is the maximum allowed by the government sponsored agencies, Freddie Mac and Fannie Mae and any loan amount higher than this will require you to pay higher interest. Moreover, any increase in the loan amount will not require a higher mortgage insurance premium because such premiums depend on the ratio of the loan amount to the property value.
If you are about to refinance your mortgage, then the new loan should not exceed the outstanding balance on the previous loan along with the closing costs including points. In such a case, it becomes cash out refinance which generally demands higher rate of interest.
Hence, if a larger loan amount due to inclusion of points requires higher interest rate, then you better not allow your points to be financed. You may also consider the fact that the points you pay are deductible but when they are financed by the lender, you do not get the tax advantage. Moreover, if your lender finances the points, it will help you provided you allow for sufficient break-even period. |
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