Mortgage Savings! Mortage Deposit/Down Payment vs Mortgage Rate Points!
Just like any other major financial decision, homebuyers are often looking for ways to make the most cost-efficient deal. When it comes to owning a home that often comes down to getting the lowest mortgage rate possible. Having an excellent credit score is ideal for setting the tone for that low mortgage rate, it’s really one of two things that can dictate what the final mortgage payments will be, the mortgage down payment the buyer makes or the mortgage rate points the buyer purchases.
Most homebuyers know that a deposit is required with any home purchase. Let’s start with a look at how making varying deposits/down payments can affect a mortgage rate. Imagine a newly married couple wants to buy a $150,000 home. They’re currently being offered a 30-year fixed mortgage with a 6.5% fixed mortgage rate and are fortunate to have some leeway in the cash they can access as their deposit. They are trying to determine how much benefit they’ll gain by making a deposit. Here’s what they found:
Mortgage Deposit/Down Payment Savings.
Deposit/Down Payment |
Remaining Principal |
Interest Rate |
Mortgage Payment** |
0% |
$150,000 |
6.5% |
$948.10 |
5% |
$142,500 |
6.5% |
$897.54 |
10% |
$135,000 |
6.5% |
$853.29 |
20% |
$120,000 |
6.5% |
$753.48 |
*These mortgage payments do not include mortgage taxes or private mortgage insurance.
As you can see, the more the deposit this newly married couple make initially the less their principal and monthly mortgage payments will be. That’s not the only benefit of making a larger deposit. In our scenario, we did not alter the mortgage rate with the change in the deposit. However, it’s likely that making a larger deposit may also make this newl eliy married couple eligible for a loan with a lesser mortgage rate, which will also reduce their monthly mortgage payment. There’s more. If this couple choose to make a 20% deposit, they would be eligible for a conventional mortgage. As such, they would not have to pay private mortgage insurance, which can easily add an extra $100 on the mortgage payment each month. While all of this sounds perfect, there is a downside to making a decent deposit which is the reasonable initial cash requirement needed to obtain the savings.
The reality is, most Canadians don’t have the leeway this couple have. That’s why purchasing points to decrease the mortgage rate offered on a loan is more appealing to some homebuyers. So, let’s say that this newly married couple would prefer not to make a deposit and are interested to see how their mortgage payment would change if they purchased mortgage rate points instead. In order to do that, we need to understand the cost of a mortgage point. The calculation is simple: Mortgage loan points cost 1% of the total loan value. In this couple’s case this means that each point will cost $1,500 ($150,000 x 1%). Presuming that this couple can afford to purchase up to five points to reduce their mortgage rate the following is a look at how the points would decrease the couple’s monthly mortgage payments: contd. Refer to top of page right hand side.
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Mortgage Rate Point Savings.
Mortgage Rate |
Cost of |
Mortgage Rate |
Mortgage Rate |
Mortgage Payment** |
1 |
$1,500 |
6.5% |
6.25% |
$923.58 |
2 |
$3,000 |
6.5% |
6.00% |
$899.33 |
3 |
$4,500 |
6.5% |
5.75% |
$875.36 |
4 |
$6,000 |
6.5% |
5.50% |
$851.68 |
5 |
$7,500 |
6.5% |
5.25% |
$828.31 |
Once again, the effect of purchasing mortgage rate points on this couple’s monthly mortgage payment is clear; each point the couple purchases will help them to save an average of $24.00 per month on their mortgage payment.
For our final scenario, let’s compare look at mortgage deposit/down payment and mortgage rate point purchase side by side. To “level the field,” let’s say that this newly married couple only have $7,500 to spend on either a deposit or a mortgage rate point purchase.
Mortgage Deposit/own Payment v.s. Mortgage Rate Points Savings Comparison
|
Home Purchase with 5 Points: Cost = $7,500 |
Home Purchase with Down Payment: Cost = $7,500 |
Mortgage Rate |
5.25% |
6.5% |
Loan Amount |
$150,000 |
$142,500 |
Mortgage Payment** |
$828.31 |
$897.54 |
Just looking at surface figures, it appears that purchasing mortgage rate points is the best financial decision. However, just as there was a downside to making a greater deposit, there is a downside to purchasing mortgage rate points. While the monthly payment will certainly decrease it’s important to note that the cost of mortgage rate points does not get applied to the principal or interest due on the loan. It’s an expense and in this scenario, the newly married couple would need to stay in the home for a minimum of six years in order to recoup the $7,500 spent on the mortgage rate point purchase and to begin seeing additional savings. (Note: The time to recoup monies paid for mortgage rate points differs with each scenario. Therefore, each situation must be evaluated independently to determine the actual point at which purchasing points would not save the buyer money.) Even if this couple do not plan to stay in the home for that long, the expense of the mortgage rate points purchase will make paying a mortgage note more manageable. That’s undeniable.
So, which option is best for you? That depends on you situation!
We trust this Mortgage Deposit vs Mortgage Rate Points information has helped you in deciding on a Mortgage. We look forward to getting you into a House or Condominium in Calgary.
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Discussing Mortgage Rate Points.
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