What’s the Point? The Impact of Points on a Mortgage.

Properties - February 2015_Page_1

Author: Alec Pacella
NAI Daus – Managing Director
Twitter @dausyouknow

In 1994, I purchased my first house – hard to believe that was over 20 years ago. And  although it was exciting, the thing that I remember most about that house was a conversation with the lender about the mortgage. I know – I have issues, but those that were around the real estate biz back then may remember how mortgage rates were at “historical lows.” And at 7.75%, my rate was indeed attractive (at least for those days).

But my conversation with the lender was focused on a concept known as “points.” If I were willing to pay two points at the time the loan is originated, an amount equal to 2% of the initial loan amount, the interest rate associated with the loan would be lowered to 7.5%. At the time, I didn’t have enough of a technical grasp to determine the exact impact of this, so I made a snap decision. But now I do – and in a few minutes, so will you.

Analyzing the impact of points can be done using a T-bar and following three simple steps. You may recall that a T-bar is a tool developed by the CCIM Institute to help visualize time and money. As shown in Figure A , time is shown on the left side of the T and represented by N. Flows of money are shown on the right side of the T and include present value (PV), periodic payments (PMT) and future value (FV). To help walk through this, let’s go in the way-back machine and analyze the alternatives that I faced in 1994. My loan was for $100,000, amortized over 30 years with monthly payments. The interest rate choices were 7.75% with no points and 7.5 % with two points. For reasons that will be apparent in a few minutes, the analysis will only focus on the loan with points. Link to full article.


About NAI Daus

Full service commercial real estate and property management company serving Northeast Ohio. #CRE #CLE
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