### Justin Perry's Mortgage Blog

Mortgage rates can be confusing but a little explanation on how "points" work might shed some light on the subject.  Lately more and more borrowers have been coming to me and wanting to pay points to get a lower mortgage rate on their home financing.  A "point" is a percentage of the loan amount paid to get a lower than market interest rate.  For example, today 30 year fixed rates are at 6.125%.  Say you needed a \$300,000 mortgage to buy a home and you wanted a lower rate than 6.125%,  so you paid 1 point or 1% of \$300,000 (\$3,000) you could get a rate of 5.875% on a 30 year fixed.

The rule of thumb is that paying 1 point will lower your rate by .25% but it doesnt always work out exactly that way.

So back to the example above.  The borrower decided to pay 1 point which cost \$3,000 to lower the mortgage rate by .25% (from 6.125% to 5.875%).  On a \$300,000 mortgage that would lower your monthly payment by \$48.  Sounds pretty good right?  Let's look at this from another angle.  Yes you are saving \$48/month but remember that you paid \$3,000 to get that lower rate.  One important factor I show clients is the payback period.  This is how long it takes the borrower to make back the money they paid for the lower mortgage rate.  In this case it cost \$3,000 and saves the borrower \$48/month so \$3,000 divided by \$48 = 62.  That means it would take 62 months of mortgage payments to break even on that \$3,000!  That's more than 5 years.  The average American lives in a home for only 4 years.  Plus if rates drop, you can always refinance your mortgage to get a lower interest rate.

I'm always a firm believer that cash is king.   Keep your money and build a nest egg.  Let a mortgage banker watch interest rates for you so you can take advantage of falling rates without ever needing to pay points.

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