Points-they matter

By
Real Estate Mortgage Broker

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

close

This entry hasn't been re-blogged:

Re-Blogged By Re-Blogged At
Spam prevention

Accessibility option: listen to a question and answer it!

To submit the form,
drag the tshirt to the circle on the side.

Type below the answer to what you hear. Numbers or words, lowercase:

Topic:
ActiveRain Community
Location:
Alabama
Groups:
1st Time Buyers
Realtors®
Responsible Mortgage Lenders
True Mortgage Professionals
Tags:
points
pricing
cost of money
central alabama mortgages
eric mcgowan
saving money

Comments 14 New Comment

Anonymous
Post a Comment
Spam prevention

Accessibility option: listen to a question and answer it!

To submit the form,
drag the camera to the circle on the side.

Type below the answer to what you hear. Numbers or words, lowercase:

Ambassador
436,448
Paul McFadden
Mortgage Loan Officer, Bellevue Washington Home Lo
Alaska USA Federal Credit Union

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.

November 15, 2008 02:33 PM
Rainer
20,192
Eric McGowan

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.

November 16, 2008 09:19 PM
Rainer
20,192
Eric McGowan

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.

November 16, 2008 09:12 PM
Rainer
331,695
Danny Thornton
WordPress Guru
R & D Art

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.

November 17, 2008 05:27 PM
Rainer
20,192
Eric McGowan

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".

November 18, 2008 08:42 AM
Anonymous
Post a Comment
Spam prevention

Accessibility option: listen to a question and answer it!

To submit the form,
drag the scissors to the circle on the side.

Type below the answer to what you hear. Numbers or words, lowercase:

Rainer
20,192

Eric McGowan

Ask me a question
*
*
*
Spam prevention

Accessibility option: listen to a question and answer it!

To submit the form,
drag the house to the circle on the side.

Type below the answer to what you hear. Numbers or words, lowercase: