17 Jun Using Points To Save On Your Mortgage Rate
The general mantra in the real estate world is you want to avoid paying points when obtaining a mortgage. As with most assumptions, this is not always true.
What Are Points?
When discussing mortgages, it is important to understand what points are. Points, or Discount Points, are essentially an upfront cost you pay a lender in exchange for getting a lower interest rate. The better your financial profile – credit score, wages, down payment amount – the lower your interest rate will be. That being said, you may actually want to demand points in certain situations.
Eric Leigh with Idaho First Bank is a Capital Group preferred lender. He says points are similar to “prepaid interest on the mortgage.” They’re used to buy down your interest rate. He explains, “Points are not fees. Points and fees are non synonymous.” Eric says that every mortgage has associated fees, but some lenders will not charge you fees per se. Instead, the lender may choose to quote the customer a higher rate of interest in return for lower or no fees loan.
Using Points To Cut Your Interest Rate
Points and interest rates have a unique relationship in mortgages. Generally, the more points you pay, the lower your interest rate. This is not always the case in bad credit situations, but it’s a generally-accepted fact for most buyers. You can use this relationship to your advantage.
For Eric’s customers, one point typically lowers a mortgage rate by .25 percent. So to lower a 4.0% loan to 3.75%, it may cost one point. However these numbers vary based on current market interest rate conditions.
Regardless of how many points you pay on a loan, the cost will never remotely approach the amount of interest you pay over the life of a 30-year loan. If you intend to live in the property in question for a long time, you should make an effort to cut your interest rate as low as possible. This is where you will save the most money. This is also where points come in.
On the other hand, Eric says it’s not always cost effective to pay points if you aren’t going to be in the home for long. “If we had the crystal ball in front of us, and we knew for certain how long we would be in this property, we could make the right decision.” He says, if you’re considering paying down points, seriously consider how long you’ll be in the property. “There’s a disconnect between how long people are in their homes and how long they think they’ll be in the home. Nobody’s in their home for 30 years. 8 or 9 years, that’s the average.”
If you’re cash rich when you buy the property, you can buy down your interest rate by agreeing to pay the lender a significant number of points. The key is to find out from the lender how much they will reduce the interest rate per point paid. You want this in writing! Once you have it, use a mortgage calculator to see how much money the various lower interest rates will save you over time. Also, see how much you monthly payment is reduced. Once you have the numbers, compare them to the total cost of paying additional points and make your decision.
Contrary to popular opinion and marketing ads, points do not represent the evil side of the mortgage industry. Use them wisely and you can save hundreds of thousands of dollars over the life of a loan!
Capital Group works with some of the region’s best lenders. Call us today at 208-639-1717 if you’re interested in buying or selling a property, or if you want a referral to a lender. To reach Eric Leigh at Idaho First Bank, call 208-880-0316 or visit http://www.ericsloans.com/