Points-they matter

By
Mortgage and Lending

Points or "buying down" the rate is becoming more typical than before. Guidelines have constricted and the cost of borrowing money for even the best of customer's has increased.

Typically, one point is equivalent to 1% of the loan amount. Lets exemplify this and we will assume that a borrower is putting 10% down on a $200,000 home. Their credit falls into the average category now for a "conforming" loan with their respective score being a 661. The loan amount proposed then, assuming they are covering their own closing costs is now $180,000. They have a "pricing add-on" of .1% for the loan size (less than $200,000), they have a credit score "pricing add-on" of 1%, and the cost today to break even at par would be at a rate of 6.25% in order to minimize their cost. 

180,000 Loan amount @ 6.25% interest/30 years = $1108.29 monthly (before tax and insurance)

As an alternative they could pay an extra point and buy the rate down to 5.875%. They are now at 1% of the loan or $1800 in additional closing costs but the savings far exceed the cost.

180,000 Loan amount @ 5.875% interest/30 years = $1064.77 monthly (before tax and insurance)

People have always assumed the worst and thought of closing costs as the enemy.

The cost of money over time though is your enemy. It will take the borrower 3.45 years to see the cost of that point but if this is the "dream home" that point makes sense. The biggest point here is that as a loan officer you should offer options. It is like you deciding upon sprinkles or no sprinkles on that ice cream cone. Providing guidance and advise to rely on is key in any major financial decision.  *IMAGE complements of flickr.com

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Topic:
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Alabama
Groups:
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True Mortgage Professionals
Tags:
points
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cost of money
central alabama mortgages
eric mcgowan
saving money

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Rainer
73,665
Sabrina Kelley
ERA The Herman Group - Woodland Park, CO
Pikes Peak Region Realtor, Teller, Park and El Paso County Colorado

I also see points and buy downs becoming a new and creative way of getting funding and saving homes from foreclosure. Thanks for the insight.

Nov 03, 2008 03:13 PM #1
Rainer
20,050
Beth Forbes
The mortgage help you want when you need it. - Center Valley, PA
Your 24/7 loan officer

It was about 5 years ago that "points" became a dirty word. Before that is was a typical part of the mortgage transaction. You're absolute correct, you need to analyze the cost of money.

Nov 03, 2008 03:18 PM #2
Rainer
20,192
Eric McGowan
Moody, AL

Sabrina, yes as rates have actually climbed rather than dipped, this can be an excellent tool for builders as an incentive to move excess inventory. Today, a 2/1 buydown would cost them 1.5 points; however, if they move a house and don't carry it for say 6 more months that itself means "money in the bank".

Nov 03, 2008 03:20 PM #3
Rainer
80,777
Julie Staradumsky
Keller Williams Realty - Atlantic Shore - Northfield, NJ
CREN

Hello Eric, thanks for the information, hopefully this will help some whom maybe on the route to foreclosure.

Nov 03, 2008 03:21 PM #4
Rainer
20,192
Eric McGowan
Moody, AL

Beth, I can remember. I have written section 32 before and block loans. Thank goodness investment property is not well received now. I know it has its' place but with restrictions. I have always offered points. At Countrywide we were encouraged to present at least three options.

Nov 03, 2008 03:25 PM #5
Rainer
32,986
Chris & Karen Highland
Turning Point Real Estate - Frederick, MD
Integrity, Experience, Enthusiasm!

Having the information to provide options for buyers is our responsibilty as realtors too. Thanks for the info.

Nov 03, 2008 03:26 PM #6
Rainer
20,192
Eric McGowan
Moody, AL

Julie, lets hope that the foreclosure situation starts to level off and that more homeowner's will actually be able to keep their homes either through refinance, loan modifications, or sale. WE all need a better 2009.

Nov 03, 2008 03:26 PM #7
Rainer
17,784
Steve Graham
Inactive - Atlanta, GA

Eric, buying discount points has always puzzled me. The cost of the point in your scenario is $1,800?

Nov 03, 2008 03:43 PM #8
Rainer
20,192
Eric McGowan
Moody, AL

Steve, that is correct as 1 point equal 1% of the loan amount.

Nov 03, 2008 03:45 PM #9
Ambassador
454,260
Paul McFadden
Paratex - Seattle, WA
Janitorial. Kent, WA.

Eric: I've never advocated paying points on a loan. I think it's pretty expensive and, with so many people refinancing or selling their homes these days (what I mean is that every 5 years or so people typically get a new loan), it never seems to pay for itself. I always thought buying down the rate was a game banks played because they knew they couldn't be competitive on the rate. Please correct me if I'm wrong. It just seems to me with rates still low ( currently 5.875%) it doesn't make sense.

Nov 15, 2008 02:33 PM #10
Rainer
20,192
Eric McGowan
Moody, AL

Paul. I am not advocating them for someone that fits the profile of a every other year refi or quick seller. However, if by the credit profile you determine, and from the conversation with the customer, that this is a relatively stable borrower, ie. one that does not move often, does not refinance often, etc. then points are a suggestion. It is not always "right" for someone to pay points. However, it maybe a great thing for some clientele especially in higher rate environments.

Nov 16, 2008 07:46 PM #11
Rainer
20,192
Eric McGowan
Moody, AL

Chris & Karen sharing all that is involved is part of the process. I think everyone should be fully aware as to what makes sense for each customer at that time.

Nov 16, 2008 09:12 PM #12
Rainer
331,895
Danny Thornton
R & D Art - Knoxville, TN
WordPress Guru

Eric, one of the first questions that I ask my potential customer is if they plan on staying in the home ong term and if they are going to keep the loan. If they are, then I explain the importance of buying down the rate.

Nov 17, 2008 05:27 PM #13
Rainer
20,192
Eric McGowan
Moody, AL

Danny, that is my main point that in some instances it makes sense to buy points. Especially if someone does not move often or when the rate environment is "high".

Nov 18, 2008 08:42 AM #14
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