Let's talk about interest rates!
At long last mortgage interest rates have trended down.
POINTS
One big differentiator in what rate you secure is whether you pay points or not.
Benefits
Is there a time when I recommend 'buying down' the rate with points?
Last mortgage ever: For some folks, they have reached the pinnacle of refinancing, which in my opinion is the ten or fifteen year fixed. Stay the course and you WILL be there someday! This could likely be the 'last' mortgage. A good financial planner may argue against this, but I will leave that conversation between you, and your Advisor. In this case, it can make sense to pay partial, or full points, as you will stay in the loan long enough to recoup the costs, and save money having paid points.
No choice: Guess what happened a few years into the current administration and reckless government spending? The cost of everything rose. Mortgage closing costs reached the highest I have ever seen. There was a point where points were not optional, they were mandatory. Not much consumers can do there if they want to close.
In order to qualify: High Debt to Income Ratio? Points can bring down the rate so you qualify. We can also look at alternate, 'creative' financing options such as reducing Home Insurance, paying off debt, or adding a co-signer, but if none of those are an option - points can be a solution. We can always try for a 'Seller Credit' where we increase the sale price, add a seller credit, and allocate those funds towards points. This is challenging in a seller's market.
A tax deduction?: Speak with your Tax Advisor, but points paid can sometimes be tax deductible. Be sure to bring your Closing Disclosure to your tax appointment.
Cons
The cost: One point is equal to one percent of the loan amount. $500,000 loan = $5,000 fee paid at closing. Many rates online, or spam mail sent, are quoted with multiple points.
Refinance: There are times when mortgage rates continue down, and refinancing (again) makes sense. There are times when this occurs within a short period of time. In this case, points paid can be completely wasted money! 'She works hard for the money. So hard for it, honey. She works hard for the money.' -Donna Summer
Is there a calculation?
You know I love to see a clear cost versus savings analysis!
Let's compare a sample purchase transaction, assuming A+ borrower characteristics.
$850,000 Sale Price with $450,000 Down Payment = $400,000 Loan
Zero Points - 6.125%
1 Point - 5.875%
Principal and Interest $2,430 versus $2,366
Savings = $64 per month. $768 per year.
The cost of the point is $4,000.
$768 x 5.3 years = $4,070
In this scenario, it will take five years and three months to recoup the cost of the point, and each month thereafter will be saving.
Nicole's Closing Advice
In this day and age of confusing, contradictory information coming at us from all angles, it is perfectly acceptable to ask questions. In fact, ask before you sign on the dotted line. During my career, I have seen countless quotes from clients in process, or worse already closed, who have a Loan Estimate that has an astronomical amount of points and closing costs. Buyer beware.
