421 Words2 Pages

Divide $11,300 into $190 and we find that it will take 59.47 months to recoup your costs in the form of a lower mortgage payment. That's five years. So looking at the surface, one might think that if you plan on holding the loan for more than five years, you should fork out the dough and get the lower rate.
The problem is that this is an inaccurate method to calculate your "recoup time". Remember that mortgage interest is deductible on your tax return and you pay more interest at 6.125 percent than at 5.125 percent. In fact, my calculator tells me that over the next five years, you would pay $14,982 in more tax deductible interest at the higher rate. Assuming a 28 percent tax bracket, this would mean you would pay $4,195 less in taxes to Uncle*…show more content…*

$190 minus $70 is $120 per month. This is the real difference in payments between 5.125 percent and 6.125 percent. Divide $120 into your cost of $11,300 and your new recoup time jumps to 94 months, or about eight years. But wait, there's more. These calculations assume a loan amount of $300,000 in both scenarios. In other words, you need to come up with the $11,300 in cash. I realize that the markets aren't doing very well these days but it's probably safe to say that over five years or more, your $11,300 could probably earn a minimum of three percent per year. That's an extra $339, or $28 each month that you can't earn if you throw the money away in points and closing costs. Subtract $28 from $120 and your new difference between 5.125 percent and 6.125 percent drops to $92. $11,300 divided by $92 is 123 months, or 10.25 years. That's an awful long time to wait before you recoup your costs. In order for the lower rate, high cost loan to make sense, you have to be absolutely certain that you're going to hold the loan that long. Otherwise, you have lost money. And statistically, people don't hold loans for more than about five years. They refinance, move or otherwise pay off the

$190 minus $70 is $120 per month. This is the real difference in payments between 5.125 percent and 6.125 percent. Divide $120 into your cost of $11,300 and your new recoup time jumps to 94 months, or about eight years. But wait, there's more. These calculations assume a loan amount of $300,000 in both scenarios. In other words, you need to come up with the $11,300 in cash. I realize that the markets aren't doing very well these days but it's probably safe to say that over five years or more, your $11,300 could probably earn a minimum of three percent per year. That's an extra $339, or $28 each month that you can't earn if you throw the money away in points and closing costs. Subtract $28 from $120 and your new difference between 5.125 percent and 6.125 percent drops to $92. $11,300 divided by $92 is 123 months, or 10.25 years. That's an awful long time to wait before you recoup your costs. In order for the lower rate, high cost loan to make sense, you have to be absolutely certain that you're going to hold the loan that long. Otherwise, you have lost money. And statistically, people don't hold loans for more than about five years. They refinance, move or otherwise pay off the

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