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**Warning this post is long, technical, & full of numbers!**

** Understanding points takes a few more words than most of us want to read.**

Mortgages are not the most exciting topic on the planet. I try to keep my posts relatively short and to the point. If you are considering discount points for a mortgage – give this post a read. If you don’t want to read it – give me a call or send me a note.

If you have insomnia – I recommend this blog and a smart phone as you try to go to sleep.

Virtually every mortgage transaction includes a discussion of discount points. Candidly, points are confusing. From time to time, I will hear good analysis on points but most of the time I find the analysis misguided.

#### **Use the right tool, in the right amount, for the right purpose**

*Points are like an ice cream scoop. If you use the ice cream scoop a few times a week to scoop your favorite bowl of ice cream, the scoop is a great tool. If you use that scoop 5 times a day for the next year it will bury you in debt – I mean ice cream. *

Let’s start at the beginning – with a definition. This definition comes to us from Investopedia along with an article they penned on the topic.

Discount points are a type of fee mortgage borrowers can purchase that lowers the amount of interest they will have to pay on subsequent payments. Each point generally costs 1% of the total loan amount and depending on the borrower, each point lowers your interest rate by one-eighth to one one-quarter of your interest rate. Discount points are tax deductible in the year in which they are paid.

**Discount points are an ancillary cost to the mortgage**

**Example:**

- The borrower is approved for a $100,000 30 year fixed rate mortgage @ 5%.
- The lender will discount the rate by 25 bps (basis points) to 4.75%.
- This discount will cost one point (1%) which is $1,000.

**What is the best option for the borrower – 5% or 4.75%?**

**Table 1: Monthly Mortgage Payment and Break Even Analysis**

5% |
4.75% |
Difference |
Break Even – Months |
Break Even – Years |

$537 | $527 | $10 | 100 | 8.4 |

**How long the customer stays in the house or re-finances ultimately determines if a discount is worth the cost!**

**Table 2: Total Mortgage Interest Paid @ 5, 10, & 15 Years**

Term |
5% Loan |
4.75% Loan |
Difference |

5 Years | $24,038 | $23,025 | -$1,013 |

10 Years | $45,761 | $43,753 | -$2,007 |

15 Years | $64,512 | $61,570 | -$2,941 |

**Table 3: Mortgage Principal Remaining @ 5, 10, 15 Years**

Term |
5% |
4.75% |
Difference |

5 Years | $91,829 | $92,413 | -$584 |

10 Years | $81,342 | $80,530 | $812 |

15 Years | $67,884 | $66,735 | $1,149 |

*equity in the home with the 5% loan than the 4.75% loan. This equity trend will reverse as the loan matures. After 15 years, the lower interest rate will dramatically improve the equity position more quickly than the 5% loan.*

**more****The average 30 year fixed loan in the US is refinanced every 7 years.**

**Work with a lender who can do the math!**

720.213.6260

mnelson@equityprime.com

@michaelfnelson2

Skype: michael.nelson2014

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