Mortgage ProgramsRate Versus Point ComparisonExplore the various types of mortgage financing available to you.
Here is an example to compare mortgages and come up with the true cost of the loan.
Example
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Lower Rate and Higher Points
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Higher Rate and Lower Points
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a) Interest Rate
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5.75%
|
6%
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b) Number of years you plan to own the home years
|
5 Years
|
5 Years
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c) Multiply (a) by (b)
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28.75%
|
30%
|
d) Points
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2%
|
.5%
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e) Add lines (c) and (d)
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30.75%
|
30.5%
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f) Divide line (e) by (b) to get the Effective Annual Interest Rate
|
6.2%
|
6.1%
|
The effective annual interest rate represents the true annual cost of the loan over the period of time you intend to keep the loan. The lower the rate, the lower the cost of the loan. The effect of paying more points will diminish the longer you intend to hold the loan. Although this example will help you determine your best choice, it does not take into consideration the time value of money. If the time value of money is factored in, the effective annual interest rate would rise slightly as you pay more points.
Points paid on a mortgage for the purchase of one’s principal residence are tax deductible in the year they are paid. Points paid on a mortgage for the purchase of other real estate are deductible over the term of the loan.
Assuming equivalent APR’s on two mortgages, one with points and one without, the rule of thumb is that the no point mortgage will be cheaper unless you plan on staying in your home at least 9 or 10 years.
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