Mortgage Advice Doesn’t Pay Off

In the April 11 “Real Estate Q&A;,” Robert J. Bruss recommends paying two points to reduce a mortgage interest rate by one-quarter percent. This is not sound advice. Two points should reduce a conforming mortgage by one-half percent.

We can assume that both the dollar amount of the points and the net savings of the lower monthly payments would be invested at a rate of 6.75% (current zero-point interest rate). The monthly payment on a $200,000, 30-year, zero-point mortgage at 6.75% would be $1,297.

However, Bruss recommends the two-point option at 6.5%, which results in a $1,264 monthly payment. Therefore, the gross monthly saving of paying these points would be $33. This saving should then be reduced by $22 a month, which is the foregone income resulting from the $4,000 in points paid. Therefore, the net saving is only $11 a month.

After 10 years, these borrowers would not have actually saved thousands of dollars, as Bruss suggests. Admittedly, the future value of these deposits ($11 per month) would be $1,878; however, this is far less than the $4,000 in points paid.

It would take more than 16 years to break even following his advice. If paying two points results in an interest rate reduction of only one-quarter point, readers should ignore Bruss’ guidance and select the zero-point option.

Home buyers may consider paying two points to reduce their interest rate by one-half percent, which reduces the break-even to a little over six years.

DAVID MEDINA

Arcadia