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Does Paying Points to Get a Lower Interest Rate Make Sense for Buyers ? An Opinion...

You are about to apply for a mortgage to finance your new home purchase.  Then the question comes up.  Should I get a mortgage loan with ZERO points... (called a "par" rate loan) or should I pay extra points up front... to get a lower interest rate... so my payments will be lower ?

That's the question !  So... what's the best answer ?

The answer for this... is pretty much the same as the answer to many questions.

It Depends !

If you are considering paying extra money... by paying extra "points" as part of your closing costs... (a "point" is one percent of the mortgage amount)... then here is what you need to decide.

How long... how many years... do you think you will be in your home before you sell it ?

Paying points... and buying down the interest rate ONLY makes sense if you are going to be in the home long enough so that the amount you save on your MONTHLY payment ends up EXCEEDING the amount you paid in points.  

In general... if you pay points... and are in your home for less than five years and eight months... you lose money.  

If you pay points to lower the interest rate... and you are in your home LONGER than five years and eight months... you end up ahead of the game... because the total of the money you saved on your monthly payments... exceeds the original cost of the points.

If you pay points up-front... and then end up moving in three years... half of that up-front money ends up wasted... because you have spent more on the points than you have saved in your three years of lower monthly payments.

Also... don't forget about the possibility of you deciding to refinance.  If you pay points for a lower rate at time of purchase... and then the rates drop, and you decide to refinance... the same thing happens.  You have wasted the up-front money you paid for points for the lower rate... because refinancing ends the lower monthly payments you ended up with... when you paid the points originally.

My advice to buyers... in general... is to keep your money you'd pay for points... in the bank.  Or... depending on your situation... use it to pay off a high-interest credit card.  Or... pay your car off.  Save a bunch that way.  

It makes much more sense... and YOU make more "cents."

 

Comment balloon 24 commentsKaren Anne Stone • March 30 2009 09:01PM

Comments

Well said!

Posted by Rich Bouchner, New York City Real Estate (Bouchner & Co. Real Estate (Rich Bouchner)) over 8 years ago

Rich:  Thank you for your kind words.  I have prided myself on being a Realtor who knows her mortgage financing.

Obviously, I am a woman of many words, and you are a man of few words.  By the way... with your "two word" comment... are you aware that when you make a comment... and the comment is longer than ten words... that you get 25 points added to your Active Rain "point total ?"  If your comment is less than ten words... there is not point credit earned.  So... if Active Rain points are important... you might lengthen your comment.  Hope you are not offended by my suggestion.  Take care... and thanks for reading my post !

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) over 8 years ago

Hi Karen:

 

I was not aware of the word requirement for comments.  Thank you for your input.  We New Yorkers are not used to such thoughtfulness from strangers!  And, no I am not offended at all...it is always nice to have someone looking out for you!

 

Best,

Rich

Posted by Rich Bouchner, New York City Real Estate (Bouchner & Co. Real Estate (Rich Bouchner)) over 8 years ago

Karen Anne  This is an excellent topic.  Just this weekend at our first time homebuyer's workshop this very question came up.  I agree with you totally that "it depends"!  Everyone always seem to think they will own their home for 30 years and never refinance. It is good to show them the statistics that indicate otherwise.

Posted by Joan Whitebook, Consumer Focused Real Estate Services (BHG The Masiello Group) over 8 years ago

Rich:  Thoughtfulness is a funny thing.  It is contagious.  The more you send it out... the more people "catch it"... and pass it on.  It's easy... just treat folks the way you want them to treat you.  Thanks for your kind comments... take care... 

And... by the way... I am always kind to New Yorkers... except for when the Yankees play the Indians, the Knicks play the Cavs, and the Giants play the Browns.  LOL.

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) over 8 years ago

Hi Karen, Great point. You explained it perfectly!

Posted by Valorie Stover, Realtor for Casta del Sol, Mission Viejo,CA, Active Adult Community! (Casta del Sol Real Estate / VesTip Realty) over 8 years ago

Joan:  Feel free to re-print my post... and use it at your next workshop.  And yes... there are no stock answers for most questions... real estate and otherwise.  There are so many other variables... that it just "depends."  Thanks for your comment... take care... be warm...

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) over 8 years ago

Valorie:  Thank you so much for your kind words.  Also... read my comment above to Rich about the number of words in your comment... just in case you are not aware.  I have been a Realtor for over thirty years... and before that taught junior high math for nine years... so the ability to explain things to people in a way that THEY can understand... has become something I enjoy doing.  Take care...

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) over 8 years ago

I agree Valorie - money in the bank is much better than an interest rate that is barely a full one percent lower for the up-front cost. If you're going to ask a seller to pay a 'point', consider asking for money for closing costs instead, and then bank that money for those home repair items that always seem to creep up on you...

Posted by Markelle Harden, Digital Marketing Specialist (Classy Inbound) over 8 years ago

Markelle:  No... I'm Karen Anne.  Valorie made one of the comments above.  LOL.  Anyway... yes... money in the bank is a good thing.  And... you would not believe how much is would cost... how many points would be charged... to get the interest rate on a thirty year fixed loan to be lowered by one full percentage point.  Much more than two points.  I would never recommend that a buyer do that.  It just does not make economic sense.  If they have that much money to spare... they really should pay off a high-interest credit card... or pay off a car loan.  What makes more sense... dropping a monthly payment by $19 a month... or doing away with a $350 dollar a month car payment.

And yes... I would much rather ask the seller to pay the buyer's regular closing costs... to save them that money... rather than buying down the interest rate.  But, then again... different things work for different people.  This is just my opinion.  Take care... thanks for commenting.

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) over 8 years ago

Karen, I too believe in keeping cash in the bank.  I think that it's generally better to accelerate the payoff of the mortgage which generally cancels more interest over the life of the loan.  I'll have to do some number work ups on this.  Thanks for the idea.

Posted by Kate Bourland, Onlilne Marketing Mobile Marketing (Marketing with Kate) over 8 years ago

Hi Karen!
We just had a lender come to talk to us about this.  In years past, the interest rate wasn't different enough to warrant paying it down.  From what he told us, this is no longer the case.  In many instances, paying it down could make a full point difference! 

Posted by Paula Swayne, Realtor-Land Park, East Sac & Curtis Park -Dunniga (Dunnigan, Realtors, Sacramento (916) 425-9715) over 8 years ago

Hi Karen Anne... what a great and understandable explanation of this sometimes confusing topic!

Posted by Steve Shatsky over 8 years ago

Karen Anne,  I agree money in the bank is far better than a buy down.  Especially in turnaround areas such as Northern Virginia.  Oh, how times change - my mother and father owned one house - they bought it at the end of WWII and just kept enlarging it as needed.  My 2 brothers, sister and I sold it after they passed away.  Karen 

Posted by Karen Kruschka, - "My Experience Isn't Expensive - It's PRICELESS" (RE/MAX Executives) over 8 years ago

 Your right Karen Anne it is diffidently a matter of time. I see some people buying points like they were on a game show. I don't get it unless the seller is contributing!

 

Posted by Paul S. Henderson, CRS, REALTOR®,, Tacoma Washington Agent/Broker & Market Authority! (RE/MAX Professionals.) over 8 years ago

I think you're right, Karen Anne.  The points don't usually pay off in the long run.

Posted by Barbara S. Duncan, CRS, GRI, e-PRO, Executive Broker, Searcy AR (RE/MAX Advantage) over 8 years ago

Back when I bought my home, points were tax deductible. Don't know if that's still the case, but it is something to factor into the equation, especially out here where real estate prices are so high.

Posted by Not a real person over 8 years ago

Personally I have a difficult time getting my head around the fact that "buying a point" usually only equates to a quarter or half percentage reduction. I agree, keep it in the bank.

Posted by Ellie McIntire, Luxury service in Howard County & Catonsville (Ellicott City Clarksville Howard County Maryland Real Estate) over 8 years ago

Jeff Belonger just wrote a nice blog post about this question.

I was told in class to NOT PAY POINTS. But I don't think that's always true!

Posted by Erica Ramus, MRE, Schuylkill County PA Real Estate (Erica Ramus - Ramus Realty Group - Pottsville, PA ) over 8 years ago

Erica:  This post of mine is in direct response to Jeff's post about points.  There are many things in his post which I do NOT agree with.  He and I commented back and forth about them in his comment section.  

I have been a Realtor for over thirty years, and have always been a part of the loan process with my buyers.  I have never been a loan officer... just a Realtor who knew her mortgage financing very, very well.  

Also... after commenting to him, and having him tell me I was wrong... I verified what I was saying to him with my loan officer.  I was correct.  Take care...

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) over 8 years ago

Ellie:  Depending on several things... paying one point... really does not buy the rate down all that much.  Per my loan officer yesterday... after being told I was in error by Jeff Belonger... I questioned her... and was told that to buy the current rate from 4.875 % down to 4.000 % would cost four and one-eighth points.  That is one heck of a lot of money.  That is why I recommend to my buyers to either keep it in the bank... just in case... or pay off a car loan or a high-interest rate credit card with the money.  And... the break even point with paying points is really about five and one half years.  Take care... 

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) over 8 years ago

Barbara:  Actually... the ONLY time paying points makes sense IS... in the long run.  But... people these days do not stay in their comes long enough to benefit from paying points to lower the payments.

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) over 8 years ago

Karen - your knowledge is such an asset to your clients and to those of us that follow you... thank you

Posted by Thesa Chambers, Principal Broker - Licensed in Oregon (Fred Real Estate Group) over 8 years ago

Thesa:  Thank you for your kind words.  I appreciate them.  And... you are quite welcome.  Hope all is well with you.  Take care...

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) over 8 years ago

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