Buying Down Discount Points To Lower Mortgage Rate?

Gustan Cho Associates at Loan Cabin Inc. NMLS 1657322
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Buying Down Mortgage Rates With Discount Points

This BLOG On Buying Down Mortgage Rates With Discount Points Was PUBLISHED On December 10th, 2018

Buying Down Mortgage Rates With Discount Points:

Discount Points is 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

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 home buyers who intend on living in their homes for a longer term
  • Buying Down Mortgage 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 home buyers who intend in 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.

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. Average mortgage loan balance in the United States is $200,000. Lets 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
APR* 4.5% 4.25% 4%
Monthly payment** $1,013.37 $983.88 $954.83
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 is for illustration purposes only and does not reflect actual mortgage rates today. These are not actual amount discount points and rates buy down. This illustration are for basic case scenario purposes and only principal and interest figures are calculated. Contact us at 262-716-8151 or text us for 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 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 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
  • 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.

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 down payment. Sellers cannot give any overages of sellers concessions to home buyers. Overages in sellers concessions needs 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 sellers concessions is a wise move for buyers planning on buying down mortgage rates with discount points.

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