The New York Times recently ran an article that covered some basics and provided some stats. Definitions are good if you are not experienced but stats are only fluff because everyone's situation is different so what John Smith does has no bearing on what you should do.
Here's the highlights of the New York Times article but read on to the end as I will make some valid points that you should consider closely before you automatically agree to what your Lender has chosen for you or what information you give to Lenders to quote you on, especially important if you are shopping your loan with 2 or 3 Lenders. so here goes the Times story highlights ...
Points lose favor
With interest rates at or near record lows, many borrowers are seeing little reason to pay points when buying or refinancing a home. Some are even opting for what’s known as “negative points,” agreeing to a slightly higher rate to help pay closing costs.
Making sense of the story
Paying points enables a borrower to “buy down” the interest rate on a mortgage in exchange for an upfront fee. The trend away from points partly reflects borrower sentiment that rates are already low enough, according to industry experts.
A point equals 1 percent of the loan amount, so paying one point on a $250,000 refinancing costs an extra $2,500 at closing, in addition to other mortgage fees, taxes, and escrow amounts. Paying a point usually reduces the interest rate by 0.25 points over its term, so for instance, instead of 4 percent, the rate is 3.75 percent.
The average number of points paid in 2011, according to a Freddie Mac survey, was 0.7 percentage points, less than half the levels people paid in the 1990s. The average has been 0.7 percent for three years, after it hit a low of 0.4 percent in 2007; in 1995 it averaged 1.8 percent, according to Freddie Mac data.
The primary advantages of paying points are a lower rate and monthly payment. To decide if paying points is worthwhile, borrowers should consider two key decisions: How long they plan to live in the home, and how much they can afford in close costs.
Many mortgage professionals suggest following this rule: If the borrower plans to live in the home for at least five years, paying points will help the homeowner to reap savings.
Some borrowers are even going for negative points, which is also called a lender rebate or points in reverse. In exchange for accepting a higher interest rate, the lender agrees to give the borrower a credit, which is usually used for closing costs.
Roger's highlights:
1) If you purchase and pay points, you can write off those points on your taxes. If you refinance and pay points, you can still write them off but you must amortize them over the terms of the loan;
2) When you pay points, you have availed yourself of a lower interest rate so that you realize a savings monthly which helps your cashflow. It generally takes 3-5 years of savings to equal the points you paid up front (depending on the loan amount, rate and term) however from that point until you pay the loan off, refinance or sell the property, you are saving $ _X_ amount monthly after the break even date.
3) If cash is a little tight when you are purchasing or refinancing, you could seek a no point loan or even a no cost loan. ..coupling this with closing credits from the seller could put you into your dreamhouse.
Talk to a Realtor® - your local desert real estate soltions expert is:
Roger A. Sullivan reachable at 760-610-3245 or Roger@RogerASullivan.com
as always - Keep the faith!
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