I’m working with a commercial investor who is weighing the loans he qualifies for. And typically by the time anyone asks me about loans they’re about ready to pull their hair out. This particular question concerned origination points. What are they? A point is a fee paid to the lender for working the loan. Typically you are charged one point for each percent of the loan. ($150,000 loan is 1.5 points which costs you $2,250.)
Let’s say my investor’s loan was a low $150,000 and he is considering two different loans. Both are for $150,000, and both are 30 year amortization.
DEAL #1 is 7.5% interest with 0 points for origination.
DEAL # 2 is 7% interest, but he wants two points to originate the loan.
What’s the ONE factor that will determine which loan is better? How long he plans to keep this loan! Here’s how he determines which deal is better…
1. Take the difference in monthly payments (principal and interest only) of EACH loan.
2. Multiply that amount by 12 months to get the annual amount of difference.
3. DIVIDE that amount into the $$ amount of points you pay to determine the number of years at which you recover the points paid up front.
If the number of years is LESS than his anticipated time in the property, he’ll be better off paying the points and getting the lower rate. If it’s higher than he plans to spend in the property, he should opt for the lower points.
I don’t have the space to show my work, but this is answer. The difference in monthly payments is $51 a month ($1049 - $998 = $51). $51 X 12 months is a savings on (approximate) interest of $612 per year. Total Cost Of Points divided by $612 is 6.13 years ($3,750/$612 = 6.13).
My client (and you know who you are) needs to stay in the property for at least 6 years to recoup the cost of the origination points. If he wants to be there for only 5 years, the best bet is Deal # 1.
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