A couple of weeks ago, I wrote about how to negotiate a low ball offer. One of the suggestions made was for sellers to provide an incentive, such as paying points. But, you don't have to wait for the seller to offer this up to you when buying a home. If buyers want to make it a little easier to pay for the Stone Oak lifestyle, they can pay points as well. What exactly does that mean and how does paying mortgage points a Stone Oak home buyer? You'll have to read on to find out.

What are Mortgage Points?

Mortgage Points - Search homes for sale in the San Antonio areaMortgage points (aka "paying points" or "discount points") are fees paid up front to lower your interest rate. Typically, you pay 1% of your loan amount for a 1/4% discount on your interest rate. For example, let's say you borrow $300,000 for your new San Antonio home. You receive an interest rate of 4.5%. That puts your mortgage payment at $1520 per month. If you pay $3,000 for a one point reduction, your rate drops to 4.25% and you pay $1476 per month. Want to go even lower? Pay $6000 for two points. Your interest rate falls to 4% and you pay $1432 per month.

Now, you need to keep in mind that the actual amount for mortgage points does vary from lender to lender and depends on the marketplace. You may even receive a tax benefit from paying mortgage points. Consult your tax specialist first. If you take out an adjustable rate mortgage, the reduced interest rate usually only applies to the initial fixed-rate part of the loan (1, 3, 5, 7 or 10 years).

Should I Pay Down My Interest Rate or Increase My Down Payment?

That depends. When you pay less than 20% down, you must pay PMI (Private Mortage Insurance). That costs anywhere between 0.5% and 1% of your loan amount each year. On a $300,000 mortgage, that runs between $1500 and $3000 per year or $125 to $250 per month. If you pay $3000 to reduce your interest rate by 1/4%, you'll need 68 months (just over 5 years and 8 months) to break even. If you don't plan on staying in your San Antonio home that long or want to utilize an adjustable rate mortgage to purchase your property, the mortgage points might not be worth it. Instead, you should put that money into your down payment. Run the numbers to decide which course of action works best for you. If you have any questions, contact your San Antonio REALTOR® or talk to your lender.

LUX Move Up* by Christine Aldrete Banks, CRS, SRS, RSPS