Mortgage Rates. When Should You Pay Discount Points?

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Mortgage and Lending with First Time Home Buyers, Pre-approvals, Fixed Rates 172223

Mortgage Rates.  When Should You Pay Discount Points?

 

As rates have started creeping up a bit I have been getting asked more frequently about the option to “buy down” or pay points for a lower rate. Discount points are an effective way of reducing your interest and monthly payment, however they are not appropriate all the time. Every client has a different plan and mortgages should never be treated as “one size fits all”.

 

To determine whether buying down your rate is beneficial you need to determine a couple of factors. First, how much equity do you have? With most markets on the decline, do you still have enough equity in your home to be able to afford a higher cost loan? For purchase transactions, those higher costs will result in a higher down payment amount in most cases so you need to be prepared for an added expense at closing. The second thing you will need to know is you future plans regarding your home. Are you a first time home buyer looking at a starter home? Are you moving from your starter home to the house you plan on living in for the rest of your life? Do you treat Real Estate as an investment and you plan to sell as soon as the market is right? What is your specific goal?

 

The reason you need to be able to answer those questions is because that is how you will determine whether or not buying down your rate is appropriate for you. It has to do with finding your “break even” point. Ask your loan officer to run a cost analysis, find out how long you will need to stay in the home to make your added loan costs be a true benefit to you.

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Points have a perception of being a negative but it all has to do with your circumstances. In the right situation, Points(or buy-downs, discounts, whatever you want to call them)can provide a tremendous benefit and save you THOUSANDS of dollars over the life of your mortgage.

 

If you want to know if discount points are right for you, call me for a free cost analysis.

 

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Mortgage Rates.  When Should You Pay Discount Points?

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  1. Martin Lopez 04/15/2011 11:39 PM
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Topic:
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Rainmaker
967,006
Edward & Celia Maddox
We Take The High Road
Solutions Real Estate

Good article on loan points.  Thanks for sharing.

April 15, 2011 11:25 AM
Rainer
24,404
Martin Lopez
Keller Williams Downey

Good information Chad, thank you for sharing.

I think if the buyer has the money or the seller is willing to cover for the rate buy-down, the most important factor would be to know how long is the buyer planning to hold on to the property, once you know that then all that is needed is just to know the lender's effective rate so you can calculate the amount of points the buyer would have to pay in order to bring the nominal rate at the percentage they want or need in order to have the payment at a certain amount... 

When you do that in front of your client and show them the payments at different options, it shows that you are professional and know what you are doing, and actually it's very easy to calculate.

April 15, 2011 11:36 AM
Rainer
32,579
Chad McDowell
FHA and VA Mortgage Loans Tennessee
First Time Home Buyers, Pre-approvals, Fixed Rates

Martin,

 

You're exactly right.  It's a fairly simple calculation, its really about understanding the clients long term goals and putting together options that best serve their individual purpose.  Thanks for your comment.

 

April 15, 2011 11:45 AM
Rainmaker
737,723
Gabrielle Kamahele Rhind
Broker/Owner
KGC Properties LLC, Tucson Property Management & Real Estate

GOOD MORNING CHAD!  I've had a couple interested in buying points and cannot decide - this is a very helpful post that I will share with them today!  How luck that I saw this!

April 16, 2011 11:24 AM
Rainer
32,579
Chad McDowell
FHA and VA Mortgage Loans Tennessee
First Time Home Buyers, Pre-approvals, Fixed Rates

Gabrielle, I am glad to hear that.  It's great when the information can be put to good use.  Have a great weekend.  Chad.

April 16, 2011 01:16 PM
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Rainer
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Chad McDowell

FHA and VA Mortgage Loans Tennessee
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