Before you make such a choice, you have to understand exactly what points represent. Borrowers pay points to lenders when a loan is settled. A point represents 1% of the face value of the mortgage. A $100,000 requires a $1,000 payment for one point. Try to see mortgage broker in edmonton for further info.


Lenders take these upfront payments to reduce the long term cost of the mortgage. There are different ways of calculating the advantage of a point, depending on the lender, but an example would be to pay 1.5 points to reduce your mortgage from the posted rate of 6.25% to 5.875%, or to 5.375% if you paid 2 points.


The longer you plan to live in the home, the more sense it makes to pay points; you also have to decide whether you can afford to pay the points. You should not even think about borrowing to pay points since this adds to the cost of the loan. If this is a first home, and you are hoping to move up to a bigger home in a few years when you start a family, paying points is probably not a good idea, and here is why.


Points can be viewed as an investment in the loan. Let's say you're thinking about paying 1.5 points to get a reduction in your mortgage rate from 6.00% to 5.50%. You are paying some of your interest in advance, in effect. See alberta government for advice.


It can be calculated whether or not it is worthwhile for you to pay points, depending on the length of time you will be in your home; use one of the many calculators on the internet or ask a mortgage consultant to do it for you, free of cost.


The $100,000 loan we were talking about would require $1,500 in points to reduce the rate to 5%. You have to find the breakeven point on how sensible this $1,500 investment will be. A $100,000, 5.5% fifteen year mortgage will have a payment of $599.55 per month. A $100,000 6%, thirty year mortgage will cost $567.79 per month.


Since the reduced rate saves $31.76 per month, you have to now compare that to what the upfront payment in points cost you. $1,500 divided by $31.76 is 47.23 months, or almost four years. That makes the decision simple; if you do not expect to be in your home at least 47.23 months, the points do not give you any advantage.


Once you have amortized that initial $1,500 investment, however, you will have a clear savings of $31.76 per month. Let us now suppose (this doesn't happen very often today) that you really stayed in your home for the thirty years; you would save that $31.76 over the entire term of 30 years, a big savings of $9,933.58! Visit now alberta mortgage broker for tips and advice.
 


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