Paying Points On Your Home Loan - A Good Idea?

Paying Points On Your Home Loan - A Good Idea?

Hi there, welcome to part two on points, commission, fees and expences. In this installment we talk about using points to buy down your rate on your mortgage. Crunch the numbers and do what makes financial sense.

Points, to pay or not to pay?

On the first installment we got as far as mutual funds, and got bogged down in the age old debate, NO LOADS vs LOADS this time we will just let that sleeping dog lie, and move on to another topic.

Let’s talk a little about points as it relates to the mortgage industry. Once again you have two camps, the no points no matter what camp, and the, hey it’s okay if it will get me the best rate, camp. And that’s the bottom line isn’t it? We want to know we got the best rate possible for our unique situation, and we want to be sure we are comparing apples to apples.

In the mortgage industry points are used to buy down the base rate on a lender's rate sheet. There will always be the base rate with zero points, then there will be pricing for one point, one and a half, two, two and a half, etc…These tax deductable points are also called discount points.

I cannot tell you how many times I got on the phone with a potential borrower and the first thing they tell me is that they will not pay any points for any reason. I think this attitude comes from the practices of some bad, small lenders who used to charge up to five points on a loan. Think about that for a moment. Your loan amount is five hundred thousand, and you have to pay twenty-five thousand off the top just to get the job done. That’s a hard pill to swallow.

Now take that half a million dollar loan and let’s give it a six percent rate. Your monthly principle and interest payment is going to be $2,997.75. Now let’s pay two points to get that rate down to four and three quarter percent. The cost of points is ten thousand dollars. Your new monthly payment is $2,608.24. That is a savings of $389.51 a month. Over the life of your loan your payment of ten thousand in points is going to save you $140,223.60. If I were to trade you 140k for your 10k payment, how long would you stand there doing the trade? I’d stand there all day. There is a catch though. If you are not going to stay in the house more than two years you may not make back that ten thousand in points, so let’s do the numbers. It is going to take you 25.67 months to pay off the ten thousand you used to pay points. After that it is all savings. If you are going to stay in the home for a year then move, you will waste money. It will take you just over two years to make back that ten grand.

In the scenario we just went over, as long as the borrower is going to stay in the home more than two years, it would seem foolish not to buy down the rate using the discount points. Despite running numerous calculations for borrowers I would still find people so point adverse, that they would not entertain the notion of paying points.

That is really all I have to say regarding points and the mortgage industry. Bottom line, crunch the numbers and you will be able to see if you should be paying points or not. There is no hard fast rule as every loan and every borrower is different. Keep an open mind and do what makes best financial sense.

Good Luck and Happy Financing.

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Shopping for a Mortgage? Six Key Numbers You Must Know Before You Get Started

Shopping for a Mortgage? Six Key Numbers You Must Know Before You Get Started

Key numbers mortgage shoppers need to know before shopping for a mortgage.

620

 

Long gone are the days when you could buy a home with poor credit. Six-twenty is now the minimum required credit score to qualify for most government-backed and conventional mortgages, including Federal Housing Administration (FHA)-insured loans. Veterans with lower credit scores who apply for loans via the Veteran’s Affairs Loan Guaranty (VA Loan) program may still qualify for a mortgage; however, they generally require a minimum of 12 months with no derogatory credit or late payments.

 

3.5 Percent

 

If you want to purchase a home using an FHA-backed loan, you must now provide a minimum down payment of 3.5 percent (conventional loans usually require at least 5 percent). Although most down payment assistance programs have been abolished, some home buyers can still obtain part or all of their down payment as a gift from a family member.  Despite some rumors to the contrary, the $8000 home buyer tax credit available to eligible home buyers up to December 1, 2009 cannot be used as your down payment on a home. However, FHA may allow your tax credit to be advanced to you in order to offset your closing/settlement costs and/or buy down your interest rate.  Contact your mortgage professional for more information.

 

0

 

Some veterans who obtain a mortgage using the VA Loan program can still qualify for zero-down mortgages and can finance up to 102% of their mortgage (2 percent covers the VA funding fee); however, they must meet certain credit and income qualification guidelines. For more information, contact your local mortgage professional.

 

6 Percent

 

Most home buyers using conventional or government-backed mortgages to purchase a residence can obtain up to 6 percent of the sales price in seller-paid closing cost assistance to offset your settlement expenses, to include buying down your interest rate.

 

729,750

 

Maximum home loan limits for conforming conventional mortgages in high-cost areas has increased to $729,000. Why is this important to you? Mortgages that conform to Freddie Mac and Fannie Mae guidelines typically enable home buyers to obtain the most competitive interest rates because they can be sold in secondary mortgage markets. Loans that do not conform to these guidelines are usually subject to higher (sometimes much higher) interest rates.  These loan limits are temporary, however, and are only valid on homes closed by December 31, 2009. To find the maximum loan limit is for your area, please visit https://www.efanniemae.com/sf/refmaterials/loanlimits/ .

 

625,000

 

Although conforming loan limits for most VA-guaranteed and FHA-insured mortgages remain at $417,000, limits for conforming FHA-insured home loans in some high-cost areas have increased to $625,500 (or higher in some areas) for loans closed through December 31, 2009. Why is this important to you? VA-guaranteed and FHA-insured loans require low to no down payment compared to most conventional mortgages and usually allow the home buyer to obtain more competitive interest rates because the loans are insured (or guaranteed) in the event that the homeowner defaults.  To find out if you live in a high-cost area, visit http://www.fhfa.gov/GetFile.aspx?FileID=134  or  http://www.homeloans.va.gov/docs/2009_county_loan_limits.pdf