To Pay Points or Not To Pay Points?

To Pay Points Or Not To Pay Points?

I get this question a lot. Why would you and why wouldn't you....Let's look at the options.

What is a point? 1% or your loan amount. If you borrow $200,000, then 1 Point = $2,000.

This would be $2,000 in addition to what you would normally spend on your normal closing costs if you are obtaining a conforming fixed rate loan. Most of the time on a normal, conforming Fixed Rate Loan you don't have to pay points unless you have a smaller loan, or because you want to "purchase" a lower interest rate on the loan for the life of the loan.

So what does $2,000 "buy" you? About .25% off of your interest rate. Instead of getting 6.375% you would get 6.125%. On a $200,000 loan this would lower your monthly payment by about $32. On a cash basis you would give up $2,000 to the lender to get back $32 every month, which you would make up for it after about 62 months on a simple division calculation.

You can slice numbers a lot more than this. You can look at the fact that most people can deduct the cost of the point from their tax return as a deduction, and the argument for paying the point would say that its not costing $2,000, its only costing $2,000 minus your tax savings. Or you can calculate the rate of return on an annual basis of your "investment" in the point, and find that it appears that there is a juicy "guaranteed rate of return" on this "investment".

This is fine, and you can go crazy working out the numbers, but there is one major universal truth, indisputable in the world that encourages me to disregard those calculations and never willingly pay points to buy down an interest rate:

LIFE HAPPENS.

All of those caluclations assume that you will keep that mortgage and that house for a certian period of time. Statistics show us that more people move within 7 years and refinance once before doing so than those that stay in a house and mortgage for a longer period of time. And if you give up your cash in a fee to save some money per month...and Life Happens to you (you have to move refinance, etc.) there is no investment left. Just a lost fee that you chose to pay. And really - if you save $32 a month where do you think that money will end up? Will the $32/month really end up saved, or consumed in your lifestyle. Instead of "buying" the point, I would speak to your Financial advisor about putting the $2,000 into a vehicle that can be a real investment, not a fee disguised as one. This way the $32/month is really captured up front in the form of the $2,000 investment, which if manged properly will still be there if LIFE HAPPENS to you. You might even be able to get a tax deduction on the investment just as you would have on the point.

The Problem With My Industry

The biggest problem in my industry is we have an incredibly powerful financial tool being sold by people probably not qualified to do so. In the money world, a $200,000 financial instrument is a very serious instrument for most homeowners - one of the most impactful financial instruments they have. It controls one of their biggest assets (home) and takes up a larger percentage of their cash flow on a monthly basis than almost anything else. For many people their mortgage is their largest expenditure per month. And it is frankly scary who my industry allows to sell these instruments. Anyone that can pass a simple test can now be a Loan "advisor" - but what most of them are really doing is selling money.

Where am I going with this! Back on course. The money that you get to buy or refi your house comes from the same pool of money on Wall Street which is buyers of "mortgage backed securities". Virtually all of the money for the best interest rate loans comes from this place - so the real cost of money is realtively equal throughout the industry. No one has a "hidden source" for money that they are funding really low rate loans with.

What they DO have is flexibility in how they PRESENT what they have to offer.

You see, I could advertise a 5.25% rate if I wanted to, but you would have to "buy" the rate down to that level. We could also give you a loan with no closing costs, which we acheieve by giving you a higher interest rate and using the money the market pays for that rate to cover your costs....It is manipulative. And if you are working with the right person YOU can choose how to manipulate the money. If you want a lower payment and want to buy it down, then you can, or reverse it up and take no closing costs and a higher rate. If you are not working with the right person, then it is THEY who are doing the manipulating and because you don't know as much as them - THEY are manipulating YOU instead of YOU manipulating the MONEY.

Ever had someone talk over your head and felt like - how can I argue with that? I don't know enough.....well I am sure you know of someone who has had that kind of experience with a mortgage company. You will not have that experience with the right person. They should be crystal clear in their dealings and never use "mortgage speak" to get you to agree to something you do not understand.

This is why most people shop completely wrong for their mortgage. There are a multitude of people who will tell you what you want to hear, which is that they have the best rate in town. But is it the lowest cost? Many times not. Is it the right program, which puts you in the best place to have financial success? If so, it was by accident, rather than a thorough explanation of the mortgage options and how they relate to your financial plan. Working with some of these people with a financial instrument as big and important as your mortgage is like shopping for the cheapest Doctor in town to take care of your health. While what we are talking about is not as important as your health, your financial health is very important! It should not be placed in the hands of a good "salesperson" with their own agenda. I have a guide to selecting the right mortgage professional available at the following link:

http://www.BridgeCapitalLending.com/InternetOffer