Buying Down Discount Points To Lower Mortgage Rate
This Article Is About Buying Down Mortgage Rates With Discount Points
Buying Down Mortgage Rates With Discount Points:
Discount Points are also referred to as mortgage points.
- Discount Points are offered by mortgage lenders for borrowers to be able to purchase them in lieu of lowering mortgage rates
- Mortgage Points are costs and fees that enable borrowers to get lower mortgage rates versus par market rates
- Borrowers can lower interest rates by Buying Down Mortgage Rates With Discount Points
- This enables home buyers to lower their monthly housing payments
In this article, we will cover and discuss Buying Down Discount Points To Lower Mortgage Rate.
What Are Discount Points
One discount point is equivalent to 1.0% of the loan amount.
- So on a $200,000 loan balance, one discount point will cost borrowers 1.0% of $200,000 or $2,000
- Buying Down Mortgage Rates With Discount Points will lower interest rates over the whole term of the mortgage loan
- Buying Down Mortgage Rates With Discount Points is a great strategy for homebuyers who intend on living in their homes for a longer-term
- Buying Down Rates With Discount Points is not recommended for first time home buyers who intend in selling and/or refinancing their home loan within 3 to 5 years
- It is more geared towards homebuyers who intend to living in their homes and not refinancing for at least 10 or more years
The longer homeowners on intending in their homes, the more money they will save over the term of their loan due to lower interest rates.
Discount Points As Origination Fees
Lenders have a maximum cap on the highest mortgage rates they can charge.
- In general, the lower the borrower’s credit scores, the higher the rate lenders charged
- Loan level pricing adjustments (LLPA) are pricing hits charged by lenders for the lender taking on a higher risk
- The lower the borrower’s credit scores, the higher the mortgage rates
- This is because lower credit score borrowers are considered higher risk
- Higher risks taken on by the lender means higher rewards
- The higher rewards for lenders are higher rates
- For example, mortgage rates will be high for borrowers with a 500 credit score
- However, there is a maximum cap a lender can charge for borrowers with low rates
- Therefore, the lender will charge discount points for lower rate borrowers
- Discount points as part of origination fees are common on manual underwriting
Borrowers with under 600 credit scores can expect to pay discount points as part of their origination fee.
How Buying Down Mortgage Rates With Discount Points Affect Housing Payments And Savings
One question home buyers should ask is how do discount points affect their mortgage loan. The average mortgage loan balance in the United States is $200,000. Let’s take a case scenario with the chart below:
Mortgage Loan Amount Financed: $200,000
|Category||No points||1 point||2 points|
|Cost per point(s)||0||$2,000||$4,000|
|Monthly payment savings||NONE||$29.49||$58.54|
|Break-even(time to recover point costs)||NONE||68 months||68 months|
|Total payment savings on a 30-year loan||NONE||$10,616.40||$21,074.40
The above chart and interest rates are for illustration purposes only and do not reflect actual mortgage rates today. These are not actual amount discount points and rates buy down. This illustration is for basic case scenario purposes and only principal and interest figures are calculated. Contact us at 262-716-8151 or text us for a faster response or email us for actual figures. A licensed loan originator licensed in your state can go over actual rates and terms.
Net Tangible Benefit And Break-Even Point
Residential Mortgages are heavily regulated by federal and state mortgage regulators.
- It is important for loan officers to consider net tangible benefits to borrowers before offering them to buy mortgage points
- Loan officers need to consider what the break-even point is when borrowers are buying discount points
- How long does it take borrowers to break even on the fees of the points?
- If the home buyer is buying a starter home and is planning on upgrading to a bigger home in three but will take them 5 years to recoup discount points, this does not offer net tangible benefit for borrowers
- This practice will be illegal
- However, if the home buyer plans to stay in their new home purchase for ten or more years and the break-even point is 3 years, this would make sense
- The borrower will get net tangible benefit on their mortgage
The way to figure out how long it takes for the break event point is by dividing the costs and fees of discount points by how much money borrowers will be saving on their mortgage payments. The figure derived is the time it takes for the monthly housing payment savings to equal the fees of mortgage points.
Buying Down Mortgage Rates With Discount Points Can Be Covered With Sellers Concessions
Most home buyers will get sellers concessions by home sellers to cover their closing costs. Sellers’ concessions can only be used for closing costs. It cannot be used for the down payment. Sellers cannot give any overages of sellers’ concessions to home buyers. Overages in sellers’ concessions need to be returned to sellers. Discount Points are considered closing costs. Most loan officers will recommend buying down mortgage rates with discount points with sellers concessions overages. Getting the maximum seller concessions is a wise move for buyers planning on buying down mortgage rates with discount points.