Another issue to research when purchasing a home is that of points and mortgage interest rates. Usually paying higher points results in a lower mortgage interest rate.
The question for the homebuyer is: Should I pay higher points for a lower mortgage interest rate, or pay lower points for a higher mortgage interest rate? The answer to that question depends on many factors, one of which is the amount of time the homeowner plans on staying in the home.
Consider two typical situations for a 30-year, $100,000 mortgage. Option 1 offers an annual mortgage interest rate of 7.25% and a loan origination fee of 1.5 points.
Option 2 offers an annual interest rate of 7% and a loan origination fee of 2 points.
1. Calculate the monthly payments for Option 1 and Option 2.
2. Calculate the loan origination fees for Option 1 and Option 2.
3.What is the total amount amount paid, including points, after 2 years for each option?
4.What is the total amount paid, including points, after 3 years for each option?
5. Which option is more cost effective if you stay in the home for 2 years or less? Which option is more cost effective if you stay in the home for 3 years or more?