Question: I’m about to lock into a mortgage rate to refinance my current > residence, but I’m a little (no a lot) confused about two rates > my broker is offering. The two rates are 6.875 & 0 points or > 6.175 & 2.25 points. I’m financing all closing costs as part > of the refinancing …. that is it won’t cost me anything out > of pocket and I’ve elected to obtain a 10 year mortgage. > Now running these numbers through a “mortgage” calculator > I get the following:

> – $100,000 @ 6.875 for 120 payments (10 years) = $1154.70 per > month for P&I.

> – $102,250 (100,000 plus 2.25% points) @ 6.125 for 120 > payments (10 years) = $1141.65 per month for P&I.

> Now it only seems logical to take the lower monthly payment. I’d > rather pay $1141.65 for 120 payment verus paying $1154.70 for the > same period of time. But my broker brings up a interesting point. > If you multiple the difference of the two payments of $13.50 by > 120 payments you don’t realize the original $2,250 put up for the > original 2.25 points. He says this is actually a more expensive > loan!!! OK…. I’ll buy that, BUT WAIT how can this be more expensive > to me if my monthly payments are lower and I don’t put up any > cash?????!! ARGHHHHHHH!!!!

> Is my logic correct here and do the lower monthly payments make more > sense OR is my broker on the right track??

Answer: The lower rate makes sense if you hold on to your house for 10 years and don’t refinance again.

If you think you might refinance or sell in the next few years (and who knows what you might want to do?) go with the no points. You’ll owe that much less.

It seems like $13/month is a pretty cheap way to reduce your debt on the house by $2,250. Your broker’s logic would be on the right track ONLY if you had taken cash out of your pocket to get the lower payment. Then you would have to worry about how long it would take to “earn back” the points that you paid. Since you’re not taking anything out of your pocket, there’s nothing to earn back.

BUT……. You are forfeiting $2,250 of equity in your home. If you were to sell your house the day after your refinanced, you would net $2,250 less if you choose the low rate option. In fact, since you pointed out that the monthly savings will never total $2,250, you will net less if you EVER sell the house while the loan still exists. For example, if you sell the house after eight years, your monthly savings will have been $1,296. But your original loan amount was $2,250 higher than it would have been, so your house would net you $954 less than it would have had you taken the no-point option.

Bottom line… it’s a good deal if you intend to be in the house for ten years. It’s not a good deal if you sell within the ten year period.

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