Pay Points or Reduce Loan Balance?

User Forum Topic
Submitted by RoxyG on August 17, 2009 - 3:01pm

What type of calculation would I use if I am trying to determine if I should use a seller's credit to pay higher points or reduce the loan balance? Are there diminishing returns with paying points assuming I will stay in the home and I lock a good interest rate reducing the possibility to refinance? Thanks.

‹ Will an offer contingent on the sale of the buyer’s home be accepted? Bank wants a $3k nonrefundable deposit? ›
It's simple just calculate
Submitted by threadkiller on August 17, 2009 - 4:29pm.

It's simple just calculate how much the total payments would be at one rate and then do the same thing at the lower rate, then take the difference between these 2 huge numbers and that is how much you would save over the life of the loan with buying down. Now lets say the ratio of the total cost of payments to the price of the house is 2.37,ballpark figure. If the amount you save divided by the cost of buying down is larger than 2.37 then assuming the economy stays the same over the next 30 years the smart thing would be to buy down. My ratio was 2.37 and the second ratio was 5.3 so I paid the points. A no brainer for me, if the numbers are closer then you have to get out your magic ball and guess what the economy will do over the next 30 years.

There are lots of calculators
Submitted by UCGal on August 17, 2009 - 4:31pm.

There are lots of calculators out there that show you the payoff time for points. Plug in your principal, interest rates with points, and without points, and it calculates how long it takes to break even on the points.

That gives you an idea of how long you need to stay in that loan and at what point the points put you ahead of the game.

If you are more worried about size of the payment, just use one of the gazillion calculators that take your loan amount, term, and interest rate - you can see what your P/I payments will be with the smaller principal/higher interest vs the bigger principal/lower interest.

It's all math. Do the calcs and see what makes sense for your circumstances.

http://www.google.com/search?hl=en&q=int...

http://www.money-zine.com/Calculators/Mo...

How much money are you
Submitted by HLS on August 17, 2009 - 7:53pm.

How much money are you spending on a house and how did you choose the person that you chose to advise you about the largest financial transaction of your life ?

Did you ask them to explain your options and if so, what did they tell you....
What % down payment do you have ?