Real Estate Buyers often have the option of choosing a
loan with a lower interest rate by Paying Points.
A Point is equal to 1 percent of the loan amount. For a $100,000 loan,
one point equals $1,000. Points are usually paid out-of-pocket by the buyer at closing.
Is paying points always a good idea? The answer generally depends on how
long you plan to stay in the house.
Here is an example - A Buyer is shopping for rates on a $150,000 home and offered a 30
year loan at 7.5 percent with no points. This works out to a monthly payment of $1,049.
However, the buyer is also offered a loan at 7 percent with 2 points (or $3,000). At this
lower rate, the monthly payment is $998, or a savings of $51 per month.
By dividing the amount they paid for the points ($3,000) by the monthly savings ($51), we
see that the buyer will have to own the house for 59 months (or just under 5 years) before
starting to see savings as a result of paying points. If the buyer plans to stay in the
house for many years, then paying points could make good sense. But if moving is predicted
in the near future, paying the higher interest and no points is the better deal. (Note:
for simplicity, the above example does not take into account the time value of money,
which would slightly lengthen the break-even time.)
Leveraging Your Money - One of the greatest financial aspects of buying
real estate is the ability to leverage your money. Leverage allows you to use a small down
payment and financing to purchase a larger investment. For example, if you bought a
$125,000 home with 10 percent down, you leveraged the $12,500 down payment to purchase an
asset worth 10 times that amount!
Appreciation - The benefits of leverage really become apparent with
appreciation, or the rise in value of a property. Using the above example, say you live in
the house for 5 years, and during that time property values in your area had rise an
average of 2.5 percent a year. Your home would then be worth over $141,000. By putting
only 10 percent down, you enjoy the appreciation for the full amount!
Paying yourself - In addition to the 10 percent down, you'll also have to
make mortgage payments. But with each payment, a certain amount of money is being used to
pay down the principal balance that you owe. This is called building equity. So in the
event you sell your house, not only can you realize a profit from your leveraged money,
you also have a chance to pay yourself back for the money you've put in over the years. |
