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Buying Points on your Mortgage aren't EVIL - Just your thoughts are.......

The Mortgage Devil

And the borrower screamed out from on top of Mount Olympus, "I want the cheapest mortgage, with no points and no costs."

The gods then just chuckled and said, No problamo, you want the infamous "no cost" mortgage or the "no closing cost" mortgage. It sounds cheap, but it comes with a higher price depending on your short and long term goals. Do you want to sell your soul to the devil? Oh, wait.... nobody asked you about those goals? hhhhmmmm - You might want to seek out someone that will explain to you the terminology and educate you on the basics of mortgages. You don't want someone that will tell you what you want to hear.

Now my borrower.... head out unto that dreadful world of lies and misinformation, and hope that you not only choose someone ethical, but someone that wants you to know what you are doing. And if they have a red tail behind them, just move onto the next one. Just because they are nice doesn't always mean that you will get treated fairly. Giving someone the benefit of the doubt for a long extensive period of time is not always wise.

balancing interest rates

Balancing your rate and perception vs Reality

In today's world of news and misinformation, you will typically hear the things that sound good to you. Rates are very low. Lowest rates ever. No cost mortgages. No points and or closing costs. But did you ever hear an ad that said lowest rates with no costs or points in one sentence? Ever read that fine print on the tv commercials? Oh, they don't give you enough time to read it? It's too small? I wonder why.... think about it.

I was talking to Ken Cook today, a very wise loan officer, that will just shoot straight from the hip as I do. He stated that we are getting many borrowers that want the low rates that are being advertised, yet they don't understand what costs come with those lower rates.

Before I start, just a quick educational piece. We all basically get the same rates from the same place. And when I say we, I mean banks, mortgage bankers, and mortgage brokers. It doesn't matter what animal you are, what type of lender you are. It all comes down to that companies profit margin. Some might be an 1/8 of a percent better in rate or $500 better in fees. In my opinion, if you are looking for the cheapest loan out there, that will usually turn out to be the most expensive one. Why is this?

You might not get great service.

Your loan officer might not respond to your phone calls or e-mails in a timely manner.

You might get the bait and switch at closing. Yes, this does happen in some cases.

Or you might just be dragged through the mud, just because the loan officer wanted to try and bring a loan into their office, to show some sort of production.

Conclusion : Everyones situation is different. Not one person is the same when it comes to getting a mortgage. There is a cost for doing mortgages, remember this. Just because you don't see the cost, doesn't mean there isn't one. Some key points to think about when speaking to your loan officer.

Make sure you go over your goals. If you are going to be in the house for more than 5 years, if might be worth it to buy the rate down with points. You want to know what your break even point is.

Points aren't a bad thing. It doesn't always mean that you are spending more money. This could be a wise investment. As it stands, it certainly is better than investing in the stock market and the points are tax deductible.

Good faith estimates. These points and fees are spelled out on your good faith estimates. Make you sure you get one in a timely manner. Please read these two very important articles about good faith estimates.

Understanding how to read a good faith estimate

Getting a good faith estimate now, not later

UPDATE as of 3/31/09 @ 10:30 am - I am adding this because of some of the comments below. Some mention thatit's not worth paying the points because it could be a waste of money, people could move sooner, and most of all, that people refinance. I just wanted to add to that.... especially more than ever, with rates being the lowest ever in most cases in the last 20 years or so.... that lenders quidelines are more harsh now than they have been in the last 10 to 15 years, and that house values in some cases aren't appraising, I don't think you can use those reasons now. I never did in the past, because again, each borrower is different. But again, more now than ever before, why ignore the lower rates even if it costs more and it could better you in the long run? I am just curious on that one... thanks

PS.. Tom Burris makes an excellent point in his comment. Tom's Comment - Sometimes this doesn't make sense when the loan officer might be charging you more points for a larger profit. This can offset your breakeven point also.

PPS..... Brian Brady gives some good mortgage history in regards to the past vs the present and how it's much cheaper to buy down the rate in today's market. Brian Brady's comment

For more educational pieces and understanding mortgages? Please read :

The myths behind zero points mortgages

The APR vs the Mortgage Interest Rate

First Time Homebuyers Series :

First Time Homebuyer Tips : FHA - Conventional - VA - Subprime - The Basics -- Part 1 of 5

First Time Homebuyer Tips : Getting Qualified & Knowing your Credit -- Part 2 of 5

First Time Homebuyer Tips : Understanding the total mortgage process -- Part 3 of 5

First Time Homebuyer Tips : FHA, a better mortgage program? -- Best Programs & Why -- Part 4 of 5

First Time Homebuyer Tips : Summary - Red Flags to be aware of -- Part 5 of 5

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Posted by Jeff Belonger-The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans on 03/30/2009 11:19 PM

Comments (64)

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Originally posted at: FHA Mortgage Expert - Tri-State Area - New Jersey/PA/Delaware: Buying Points on your Mortgage aren't EVIL - Just your thoughts are.......

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64 Comments on Buying Points on your Mortgage aren't EVIL - Just your thoughts are.......

MAR

2009

No, buying points is NOT Evil. However many borrowers are unaware that they are buying that lower rate. Too many times my customers receive a rate quote from another lender who tells them there are no points but the good faith shows 1-2% origination.

Eric J.

http://www.dreamhomefinancing.com

Thanks Jeff for your post.

With my business model my margin is the same however the client wants the mortgage. Now if the client plans to stay in the home for a number of years I will show many options where it is better to pay more up front. My challenge is when the client wants a cut of my margin.

I help people and charge a fair margin. I have no need to cut it

Tony

Thanks for the explanation! Now to get through to the buyers!

Jeff - as always you have presented mortgage issues for buyers to think about, and the pro and cons they should be aware of. I have personally often paid points because it made financial sense to do so. In my experience a deal that seems to good to be true, or a rate, usually isn't. I hate to see buyers make the mistake of going after what they see as being a great program only to find out it is costing them far more. And teh mortgage servicing can vary so much. Nothing worse than running into problems and your mortgage officer is nowhere to be found.

Jeff

ERIC...... . Many borrowers are unaware because the loan officer doesn't explain it to them in detail for two reasons in my opinion.

They either don't want them to know the difference, because then the borrower becomes more educated and can shop better or...

The loan officer doesn't truly know or understand themselves.

And yes, that ticks me off when a loan officer tells them no points and or fees, yet it shows up on their good faith estimate. I talked to one client tonight who told me their loan officer told them their rate was about 4 to 5%... LOL Gee, that is a wide gap... it certainly makes the borrower more at ease in their mind, thinking that 4% is very possible. But they aren't being taught about the differences in cost, etc, etc. thanks

TONY..... . this is a great business model and is very easy for you and I to give out rates and such. But to the average borrower, they don't know this and think just because someone can beat us out on paper, that it will happen that way. And 9 out of 10 times, it will be the opposite and they will usually get a higher rate and or more costs added at closing. It just happens this way. If I did mortgages at rock bottom costs, I wouldn't answer my phone or e-mails and not educate borrower or explain to them in detail... taking calls at 8 pm at night or on the weekend. Some good points... thanks

BRIDGET.... . my pleasure. And yes, now to get through to the buyers. We need more people to take the time to educate these buyers, in a way that they would understand. But many loan officers just make promises to ease the borrowers mind in the beginning.

JEFF D. ...... . You hit the nail on the head with your last statement. Most borrowers will be able to track down their loan officers when promises start to be broken. I am a firm believer in educating the borrower. The more they know, the more that I know that I did my job. And the better that I will feel and sleep at night knowing that I did my job... and that they got a good deal and understand it for the most part. thanks for your input.

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.

My advice to buyers... in general... is to keep your money you'd pay for points... in the bank. Or... use it to pay off a high-interest credit card. It makes much more sense... and YOU make more "cents."

Jeff - thanks for this post! I had to re-blog it because besides rate this is this the 2nd most asked question.

KAREN...... . I am going to disagree with you. As I stated, each borrower is different and so is the time frame that it would take to recoup those points. It comes down to a few different things. It depends on the size of your loan amount, the difference in payment, and the different in the new rate versus the old rate. When buying a new home, it comes down to some of these factors also. Overall, there is no set time frame as you stated, 5 years and 8 months. In my 16 years, it usually comes out to 4 and a half years.

There are other factors that you need to take into account when determining the break even point. The reduction in principal and the fact that you can write-off points both on a refinance or a purchase. The only difference with a refinance is that you can only deduct your points during the life of the loan, yearly. A purchase? A certain percentage in the next tax year.

In regards to telling people what to do with the money? Again, there are too many factors involved to tell the borrower, each and every single one of them, the same thing as you mentioned. Again, this is just my experience of 16 years. The biggest thing on this is that it is a tax write-off and you actually get some of that money back when doing your taxes.

NAOMA.... . my pleasure and thanks for reblogging this. I just think more people need to understand this. And it's up to people like you and I to educate the average borrower. thanks for the comment.

Jeff: I just knew you would disagree... and that is ok. This is where I disagree. IF the loan amount is higher, so are the cost of the points. Equal trade off. The higher the loan amount, the greater the difference in payment... which goes along with the higher the cost of each of the points. Equal trade off. The difference between the old rate and the new rate is determined by the number of points paid. The more points paid, the greater the difference is between the original rate and the bought-down rate. And... every time I have sat down with a loan officer and computed the break even point... it has always been between five and six years. So perhaps we can agree to disagree.

Also... I usually leave out the mortgage interest rate deduction from the conversation... which changes the recapture numbers a bit. But... mortgage interest is deductible... and the interest on high percentage credit cards and car loans is not. That is one of the reasons I suggest to my buyers that they pay off a debt that has a high and non-deductible rate connected to it. If they can take $5000 and pay off a car with a $350 payment... or pay two points and save $30 a month... it depends on which choice makes sense to them. In my experience, most would choose to pay off the car.

I know you are a very knowledgeable loan officer... and I have been through 33 years as a Realtor who has always climbed inside my buyer's financing to help explain the ins and outs of their financing when their loan officer talked too much "industry lingo-ese" to them. Also... I cannot think of even one of my buyers who felt they were surprised by how their mortgage ended up. I made sure before they left the closing table that the closing agent, and the mortgage loan officer thoroughly explained their loan and the ramifications thereof. So... keep up the good work on your end... and I'll try to do the same here in Cowboy country. Take care... and thanks for all your great financing posts.

because the total of the money you saved on your monthly payments... exceeds the original cost of the points.

This is a common mistake, Karen. The truly accurate way to analyze the cost of a discount fee is to segregate the interest paid from the payment to determine the breakeven. If you tabulate the interest saved (not the lower payment) you'll get a better read.

Tax deductibility should not be ignored, especially if you're dealing with borrowers who expect lower income soon after the home purchase. (retirement, spousal job change, growing family, etc). Discount fees are really "pre-paid interest" and are tax deductible if paid in cash. A dual-income couple, expecting to reduce to one income after the purchase, would be well-advised to accelerate the interst (in the form of a discount fee) to maximize the tax deduction and lower the cost of capital.

Genrally speaking, in this interest rate environment, the breakeven is accelerated to 2-3 years for breakeven and not the 5.5 years you suggest. That could change if we get some stability in mortgage markets (but don't expect that for about 6-8 years)

I used to get points with all of my mortgages, however, I've never kept the loans more than three or four years. I've probably lost out by paying the points.

Kick a** post. I'm subscribing for more dosages. Love AR for this kinda stuff

Points can be a great thing depending on how long you plan to own your home

MAR

2009

Phenomenal post, Jeff! This should be required reading for every homeowner! This is one of the best times I have ever seen for buying down the interest rate with points!

Jeff, Thanks for the great post and warnings! Now the hard part; "putting it into the minds of home buyers and home owners". Regards,

KAREN.... . Well, I am still going to disagree... sure, there might have been times when the breakeven point was a tad longer, but not with today's rates and what it costs them. Besides, in most cases, in any comparasion, it was less than 5 years when I did the numbers. And my main point is comparing the difference between rates. If you start with zero points and compare paying 1 pt, then 2 pts.... no matter if you pay 1 pt or 2 pts, the breakeven point will usually be the same. But again, it depends on the spread between such rates. The spreads in the last decade have usually been roughly the same. Yes, there are some exceptions and we even experienced this in the last 12 months, but that hasn't been the norm.

I do apologize for mentioning how long that I have been doing this, because even in my first year of the mortgage business, I still made sure my borrowers broke even or knew when the breakeven part would be. To me it was simple math. And I am not talking about paying points and then adding more points to that to lower the rate even more. I'll write a blog about this and compare the differences again.

Overall, as I mentioned, each borrower is different. You can't tell each and everyone to pay down the credit cards with the money not used. There is another theory on this... take the money that you saved on your payment by buying down the rate and use it to pay down the credit cards. Depending on how long that you will be in the house, this could be a larger savings in the long run. Again, each person is different with different debt loans. In any case, I do appreciate your kind comments... thanks

BRIAN.... thanks for pointing that out. Showing interest saved is a better way to show all of this and this can be shown very easliy when comparing truth-in-lending statements. But this can also be much more confusing to the average borrower in my opinion... unless you are a money geek as yourself... and showing money saved is usually the easier way. Besides, showing one or the other nets you the same result, as long as you are usuing accurate info.

In regards to your statement about the breakeven point... yes, this is even more true now than in previous years. But from what I can remember, it wasn't to far off, depending on what rates you used and the spread between each 1/8 of a percent, if it was an even spread. It goes back to if the loan officer is using the correct coupons in their comparisons, which I failed to explain to Karen, above... thanks

TODD... . in more cases than none, probably so. But again, on purchases, you get to write-off the points in the next tax year. thanks

GREG.... . well, thank you very much for that enthusiastic comment... it's much appreciative.

JIM..... . yes, I agree... that was the main point and something that I have found that not all loan officers go over with their borrowers. One of the most important questions that needs to be asked is... how much money do you have and how much of it do you want to use. And at about the same time, going over their 2-3 year goals and their 5-7 year goals. Sure, goals and time frames can change, but you need to start with a plan. thanks

JB.... . I would totally agree 110%.... but there seems to be more people in the last 6 months that wants no points than ever before. And if they shop, they will get many loan officers that will agree with them, because they either are afraid to educate them in fear of losing them... or that they just don't know the difference or how to explain it. That's at least my opinion on that. And thank you very much for that polite compliment... I truly appreciate that, especially coming from another loan officer.

PETE.... . I think if we can keep writing about this and talking about it, that more consumers will see the light on this. And as sad as this next statement is, it holds very true to what is written online... but many people will believe in what they read, even if it's wrong and or not good for them. I have found out that it depends on how you break it down for them also, if that makes it more believable or real. To me, numbers don't lie, as long as they are not stretched and such. thanks for the compliment.

Naturally everybody wants the best service at no cost. I do, but like you said you have to look at the whole picture, analyze the situation, talk to a couple of people, then make the informed decision

Jeff, Your suggestion to be careful who you do business with can never be overstated and extends to all walks of life, including realtors. Great post.

Thanks for explaining the lender's point of view. We hear this all the time! I don't want to pay points!

I reblogged.

We are definetly on the same page...and if we were in the same state, you would be our "lender of choice". Knowledge is power....don't leave the lender without it is what we tell our buyers. Know what you don't know...ask questions until every one is satisfied and you have a complete understanding of what you are paying and why.

Great Post - that's why we always get the seller to pay all the closing costs for our buyers - then there is enough to buy down the rate. EVERYTHING IS NOT FOR FREE!!!!

Thanks for the post. Twenty years ago, a loan officer who was very conservative, he wouldn't do adjustable rate mortgages, told me that if the cost of the points is greater than the savings over three years, keep you money because it is better to have it in a rainy day fund, or invest it for the interest. I still use that when I advise clients.

I think mortgage points are one of the most misunderstood things in real estate and as a result many borrowers are leaving money on the table over the long term by insisting on cheap loans.

Every once in a while we will have a client that ventures into the late night tv loan realm. If we can get from app to funding, and that us a huge "if", there is usually something horrifically wrong with the loan. Extra closing costs, rate higher not the teaser they saw, or no one to cover per diem because the tv lender could not close within allotted time. Great post.

Thanks Jeff for the great post and helpful information! Buyers should read this!

Mary

Hi Jeff, Good post. Thanks for sharing.

Best - Sash

I don't agree. There are too many variables in today's market place. I usually recommend a fixed rate loan with as low closing costs as possible. I have been in the business when the rates were 18%. I have had prospects tell me they would be in their house FOREVER and then call me in 6 months cause their mothe neede help or someone was laid off or got sick.

You name it I have seen it. Nothing is forever and a sure thing is worth paying a little more. No or small closing costs are like an insurance policy.

If only every agent has recommended what I do to my prospects! We would be in a lot less mess than we are now.

Now all of us are paying!

Jeff: Thanks for the post. The only thing I disagree with you on is paying points. Although sometimes it might make sense, I generally think it's a bad idea. It's extremely expensive and, given the fact that most people will refinance their mortgage again, probably not worth the cost. It's funny how so many people ask me if my rates come with points. I say no. I think paying points is another trick people in our industry use to get the loan. Granted, if you're an investor it might make sense. Otherwise, I think paying points is a waste of money in most cases. Thanks for the post!

Jeff - Great post and super recommendations. You are right in that the buyers that are looking for the no cost, no point mortgages might end up hurting themselves in the longer term with the items you mentioned (lack of service, risk of bait and switch...etc). What is amazing out there is all the misinformation. Buyers can get such a super low rate that their greed might get in the way like trying to by a stock at its 52 week low. I wish our rate was lower on our primary and some of our investment properties.

Outstanding post Jeff.

Points aren't for everyone. I discourage them for my young newly wed clients. And recommend them for the seasoned buyer looking to settle for a long time in one place(like empty nesters). <= is that age discrimination? LOL

The numbers don't lie!!!

I make the same amount of commission with or without points(code words for, I actually use the money to buy down the rate). Yes, some loan officers will abuse this and keep some of the points..... and maybe that is why they have gotten a bad rap.

I do not include the tax advantage in my calculations either. But I do explain that there is one and will answer questions from there.

Some of the comments here show exactly why the realtor needs to fodus on the home and contract and let the buyer make their own INFORMED decision on what financing is best for them. I tell my clients to consult their financial planners or CPA.... And I have never had someone come back and tell me that the planner/cpa said I was wrong. Because I am not.

Is there risk? Sure! Plans change... people move sooner than expected due to life events. But MANY can forecast with great accuracy how long they plan on staying in the home.

What I like about this blog is that you put out CORRECT and FACTUAL information. You aren't providing an uninformed opinion.

Jeff,

First off, great post again. This is a subject that's so emotional when it strictly should boil down to dollars and sense (not cents!).

It's so funny to see the detractors say they would never recommend points, yet these same people would undoubtedly recommend a refi if the rate reduction made it feasible. What's the difference between paying 2 points now to get, say a 4.25% rate or refinancing 2 years from now to get the same 4.25% without paying points?

Paying a fraction of the costs of refinancing to obtain a better rate can and often is feasible given today's spreads. It all depends on your borrowers plans. Can plans go awry? Sure they can, the same way I have done refinances for couples that were forced to sell within a year because of unforeseeable family issues. I can say I've had recent deals where my buyers paid points they will recoup within 12-24 months, and scenarios like that represent huge savings that shouldn't be hidden from any borrower.

Gerry Suarez, Jr.

Your FHA Loan Pro!

Jeff,

This is a very very good post! I think I will give you link love at some point too on one of mine! Brief, straight to the point, and you didnt go off on any tangents with opinion! Well done! The only suggestion I WAS going to make at all, YOU COVERED when you added your additional comments.
I think the most important thing about POINTS is very simple, and DOES boil down to the customers situation! You obviously do a very good job of analyzing your customer's needs like I do. I have gone as far as posting 10 questions on EVERYONE"S computer that they MUST ASK before they qoute a rate! That is going to be my blog today! ANyway, without those answers, you have no idea of a person's goals, hopes, dreams, or even if they HAVE A PLAN!!!

What your blog does best is show that there ARE options that NEED TO BE considered! I always give a customer a NO POINT option, as well as a 1 pt option.....That way, they can pick which one they want...In pauls case above, I disagree with him. However, if the yield spread on his loan sizes makes sense, that might be where HE is coming from, but due to the limited response, I dont know for sure! For example, if his average loan size was 400k...Then making 1.25% ysp on every deal, is a good honest living, and probably means he is staying competetive in the market. That same deal, with one point, means the guy gets close to PAR, which is probably what.....37%-.5% difference in the rate, and MIGHT BE A GREAT SAVINGS FOR HIM! Throw in the potential tax decutibility, and you have a SMOKING DEAL that is easier even yet to sell! I dont know Pauls approach to selling, but points are NOT EVIL! They are a selling BENEFIT in many cases, but ONLY if WE in the lending industry ask alot of questions!

Great job Jeff!

Darin

Gerry you mentioned something that I forgot.

Great time to buy points.... your money goes a long way on today's rate sheets

The only thing I disagree with you on is paying points.Although sometimes it might make sense, I generally think it's a bad idea. It's extremely expensive and, given the fact that most people will refinance their mortgage again, probably not worth the cost.

Paul, do you think mortgage rates are going LOWER than today?

There has never been a time, in my 22 years of my consumer financial services career, where paying a discount fee is more compelling than today. Here's why:

1- Rates are going MUCH higher, most likely for a 5-7 year period. The money supply has nearly tripled in the past 6-8 months and government borrowing is out of control. Think 1977-2.0.

2- Real estate valuations will remain flat for 3-5 years.

3- The breakeven mark for paying points is 2-3 years right now.

This is just a math problem and the math is overwhelmingly in support of homeowners paying a discount fee right now.

If you're not explaining the value of a discount fee to borrowers, you're doing them a tremendous disservice. REALTORS, if you're not asking originators to show three examples to your borrowers, including 1-3 points, you're doing your buyers a disservice.

JB, In the past 20+ years I have always done zero point loans, in the past 0 made the most sense. But today.... the buy up buy down it makes so much sense to consider points today. The vast majority of my loans this year have had approx 1 point. It is Cheap to buy a lower rate today.

Thanks for the reminder. As a well-respected Mortgage Professional I appreciate learning your perspective on point and these historically low interest rates. I don't honestly think the principles have changed much. It still comes down to working with a lender you trust and who provide great service and choosing the loan that best suits the individual borrower's needs.

MORGAN.... . I am sure nobody will disagree with you on that one, that people want the best deal possible. But as we both agree, we need to evaluate their whole situation to help determine this. Just because the costs are the lowest on paper doesn't mean that it will be cheaper for them overall, both out of the pocket and in regards to savings. thanks

BARB.... . I am sure that is good advice for anything in life. But for some reason, I find it even more important when it comes to mortgages, because this happens to be one of the biggest financial decisions in ones life. And in more than several occasions, their choice of loan officer/lender could be wrong and cost them thousands of dollars or more. And thanks for the compliment.

ERICA.... . my pleasure and hence why I wanted to write about this. I am hearing more now than ever before, on how people want to pay no points... when as several have stated in their comments that this is one of the best times to buy down your rate. And thanks for reblogging this...

SALLY & DAVID.... . knowledge is power, hence why I love writing these kinds of posts. I think half of the loan officers out there don't explain this in detail and I know this from after I interview borrowers after they have spoken to another loan officer. Even though I am not in Wisconsin, if I was licensed there, would you still do business with me? There will be a blog written by an out of state realtor soon, in regards to a client that they referred me to and the smooth closing process, that the previous lender couldn't make happen. thanks

RICHARD..... . Bingo, nothing is given away for free... well, in many cases, especially when it comes to mortgages. And you bring up an excellent point that some loan officers and realtors are against. I think it's a wise financial decision to raise the price a few thousand dollars to use that money to pay for points. But again, it comes down to that buyers goals first. But if it makes sense, and numbers don't lie, then do it. And thanks for the compliment.

JOE.... . I will semi disagree with that advice. One reason being is that I know some parents that just know they will be in that house for 5 years or so. Yes, you can never predict the future with 110% certainty.... But example... if I have kids and they are in 3rd grade, in a great school system... great neighbors, and the kids have their friends locally... I would keep the house until high school. That's beyond 3 years and well over 5 years. So you would recoup your costs.

All I am trying to say is that you shouldn't use a 3 year rule, but you the "goals rule". What fits into your plan and or your goals. Not just because it is greater than 3 years. Let me ask you this, as a financial question. If I told you that I would be in the house for 10 years, because I know my situation and goals... and it was going to take me 5 years to recoup those points, that it would be a bad move for me then? Just curious... and in regards to adjustables. I truly believe each program has a purpose, if explained correctly. Adjustable rates in many cases weren't bad or evil also. Just think if you had an adjustable at 6% a year ago, that your rate would have dropped by now, saving you the time and money in refinancing. Just food for thought. thanks

Jeff - Wonderful discussion here and I'm not sure I can add anything that hasn't already been brought to everybody's attention. In my mind, if folks have a good understanding of points, they can then make the best decision for their particular situation. But to just assume that 0 point loans are the best deal going is a very misleading mindset to have. Nice work here.

Great post! I had a very similar conversation a few weeks ago with clients. If the no points, no costs are offered, better be careful with what interest rate you'll get locked into.

Another problem people might have with their re-fi's is that appraisals are coming up with the magic numbers anymore. I work with a lender who is inundated, up to his eyeballs, in re-fi applications. He won't even begin to process them without finding out how much the home will value out. There's no sense in starting the process if the value isn't there. I wanted to re-fi my home and it's the same story, it would be hard to find the LTV now.

For home buyers, now is the time to have your real estate agent write up seller concessions which might include having them pay for the points buy down. Even if only 1/4% it's still a good savings over the long haul.

good post....

Started following you on
Twitter.

MARK..... . I agree 110%, hence why I thought it was time to write about this again. Even if you read some of the comments, some loan officers have different opinions. I don't have a problem with opinions, what bothers me is that numbers don't lie. And for some loan officers not to sell points and take it upon themselves, I think is wrong. If the client doesn't know, how can they even not make a fair decision.?? thanks

CONNOR & PARIS..... . yes, the good old bait and switch lenders and loan officers. Not everyone, but there are more than what people would think. There are even mortgage companies that specialize in this. ANd yes, you don't usually find this out until the end, when it's too late, and or when things go wrong. thanks

BRUCE & MARY.... . my pleasure... and I hope many consumers read this, even some realtors. But in my opinion, they should stay out of the financing end of things and leave that up to us loan officers. And thanks for the compliment.

SASHA.... . thanks for stopping by and for the polite compliment.

NORMA.... . it's okay not to agree and yes, there are too many variables in today's market place. But curious, you said this.... "I usually recommend a fixed rate loan with as low closing costs as possible."

You are a realtor, right? Just curious to why you would make these recommendations to when this should be left up to loan officers that deal with this daily. Part of my argument would be that I don't tell people how to buy homes and how to make offers... or how to sell a home. Even though I have a good idea about this and could pull it off, I tell them to speak to a knowledgable and professional realtor.

In regards to previous clients telling them that they would be in the house for many years, but then to call you up 6 months later, that things have changed... ??? That is part of life, we can never be certain. But we can certainly have a very good idea in what we want and what our goals are.

Overall, in my opinion, to tell every buyer not to pay points or go for the lowest closing costs, you are doing a disservice to each and every person. Why not give them both options at least and let them make their own decisions? Besides, you are a realtor, right? I crunch numbers every day and I try to find the true value in their rate and funds that they have to use. In many cases, you can't get the same return or bang for your buck in the stock market as you can with paying down the rate, buying the lower rate with points. Especially if you were to be in that house for 6 to 10 years. Do you know that the average person stays in their house 6.8 years. That was a figure up until 2005 or 2006. Even if it dropped to 6 years and I could show you how to recoup your costs in 3 years... even if you moved out in 5 years, I just made you money, gave you a good rate of return that is hard to find in many different areas.

Lastly... your last comment... "If only every agent has recommended what I do to my prospects! We would be in a lot less mess than we are now."

Do you firmly believe that if everyone took your advice, paid no costs and or low or no points, that we wouldn't be in this mortgage mess? I am not sure how someone using $3,000 of their monies to lower their payment $120 a month, would get these people in trouble and would be the major issue of the mortgage mess. One of the big issues was home values dropping drastically... how do paying costs or no costs change that? How about those loan officers that put people into a toxic loan program, that might have been a good program, but was never explained to them. Again, still not sure how you advising people not to pay costs would make any of this better. I would love to know the difference.

In any case, again, it's okay to disagree. But I ddin't read anything that you stated that gave me clarification to why your advice would make things better... and why. And that because of people paying points, that we are all paying for it now??? Not sure how that is relevant to people paying points, that we are in a major mortgage mess now because of that. thanks for your input and for your time.

I'm not a fan of buying points, but I would agree you need to compare apples to apples. Run a simple spreadsheet and you will find the point that it makes sense to pay the points. If you are looking at a 5 year horizon it often doesn't make sense, but run the spreadsheet to find out for sure.

PAUL..... . As I have told many, it's okay to disagree. But if one disagrees, usually supplying fact and numbers to debate the opposite and not just opinion. I shared why points can be good, when you know someones goals and plans, and to show the break-even point. So my question to you, why is it bad to pay points besides your statement that it's a waste of money? To me, wasting money is never getting a return on something. If I am able to recoup my costs, or in this case, the points and make money, how is that a waste of money? And for the fact that it can be a tax break also, writing off the points.

On another note, you said it's extremely expensive. There are several ways to pay for points.... you can pay for them out of your pocket or have the seller pay for closing costs, and you still get to write off those points. But isn't having a payment $120 higher per month expensive and or costly also? In 5 years that is a total of $7,200 that you wasted. So I am just curious on what you consider is expensive. thanks for your input.

CHRIS & STEPHANIE..... . you hit a nail on the head by stating that greed could get in the way and actually cost the borrower more money in the long run. And yes, those looking for no costs will usually get even a higher rate or possibly get a bait & switch. It's from those that over promise and under deliver. thanks for the polite compliments.

TOM.... . bingo, points aren't for everyone and numbers don't lie. I am sure that there are a hundred ways to look at this, but to say that everyone should buy points or that nobody should pay points to lower the rate, I think that is a poor way to consult borrowers.

Two points that you bring up that I think should be mentioned again.

A good loan officer is going to make the same, no matter how many points you charge. I had a client once tell me that I made more money by charging more points. Once you make people aware that there is a sliding scale with a specific spread between each rate in increments of 1/8's, then more would understand.
Yes, there is a risk... there might be some times when you aren't in the house as long as you expected. Gee, isn't putting your money in the stock market a risk then? Is that a waste of money?

Overall, there are several ways to build wealth with real estate. In my opinion, a very good loan officer will present many different scenarios, giving the borrower the best options. thanks for your input and for a very polite compliment.

Jeff - Nice post. At the end of the day, this is just math. In its most simple form, the breakeven point is the tax adjusted amount paid on points divided by the monthly savings. If a buyer believes he or she will sell before then, don't buy the points. If not, taking the points is possibly the right decision. Before buying they should evaluate whether this gives the best rate of return. Knocking a few grand off of a 16% credit card may yield better results. That being said, if you have a few grand, why haven't you paid off that credit card?

OMG!! We have a winner!!!

Thank you, Erik, for having a brain.

Please don't hire some of the responders here. They ALWAYS advise no points, ect.

Over 100 comments, way to hit it out of the park Jeff!

The Mortgage Coach program is the best at providing a relatively easy analysis to follow about the TRUE pros & cons of paying points. You have to take into account the extra principal paid off as well as the interest paid and the closing costs + points.

I presented two clients their options this week. One decided to pay points, the other decided not to - both were happy with their decisions.

Jeff,

Good point about the fact that we mortgage loan originators look at the same rates, so when someone quotes a rate too good to be true, it is exactly that. It's important for the consumer to know that.

Jeff and Brian: To pay a couple thousand to better your rate by 1/4% is expensive. It doesn't really matter who pays it. It costs a lot. I realize you guys have been doing this awhile and I applaud you. And, again, I think in certain circumstances it can make sense. However, I suggest a financial advisor (which we really aren't ) might be a better barometer for whether paying points overall is a good strategy. Sure, it's tax deductible and all that. I'm just very conservative and am trying to brand myself as the guy who's looking out for my clients best interests. Again, given the fact that most people do something new with their mortgage every 5 years or so (and the fact that they're already paying some sort of closing costs) it's almost like double dipping. Yes, we get the deal because we had the lowest rate, etc. The question is what will the client say. I would bet more often than not they would conclude it financially wasn't their best move. My clients are older, smart with their money, and not easily fooled. Not that we're trying to fool them here. But we do need to give them the best advice. That is what they remember. Perhaps I'll try and do a paying points loan. But honestly it makes me nervous. I wouldn't want to risk a relationship because they took my advice and then didn't like it. I know that may sound safe but it's tough enough to get new clients. Therefore, I think it's worth it to keep the old ones. We do that by giving sound advice that doesn't come back to bite us. Again, thanks for the post. Your posts are always well thought out and I enjoy reading them. Keep up the good work! Take care.

APR

2009

However, I suggest a financial advisor (which we really aren't ) might be a better barometer for whether paying points overall is a good strategy.

Actually, I am a financial adviser. I suggest that you should be, too.

To pay a couple thousand to better your rate by 1/4% is expensive.

Incomplete statement, Paul. Paying a couple of thousand to lower a rate .25% for a $400,000 loan is an AMAZING deal; it isn't for a $60,000 loan. If you're interested, the proper way to analyze discount fees is outlined on Bloodhound Blog. I did it by hand but there are two programs (that I know of) that perform Total Cost Analysis for you. Drew recommends Mortgage Coach; I use Loan Magic.

My clients are older, smart with their money, and not easily fooled.

Then paying a discount fee should be simple math to them. Especially if they're income will be declining in retirement.

Not that we're trying to fool them here. But we do need to give them the best advice. That is what they remember.

Deosn't that make you a "financial adviser", Paul? :) Feel free to call if I can be of help.

Paul,

I just thought of an interesting case study,that may apply to your clientele (older folks) and why they should be paying points in this environment. It appears you do business in Renton; a big Boeing location.

While it makes sense to pay points, WITHOUT the tax consideration, when you consider the tax implcations of a near-retiree, it REALLY adds to the savings. Discount points are really pre-paid interest (when used to buy down the rate). If they pass the IRS litmus test, they are fully deductible in the year they are paid.

Consider a 60-year old Boeing employee: good income today, reduced income in 3-5 years. Most likely will itemize deductions today and will most likely take the standard deduction in retirement. This means that accelerating mortgage interest deduction (including points) today in a trade-off for a lower mortgage rate (in 3-5 years) enhances the already mathematically proven savings of paying points; the mortgage interest dedcution may very well be useless (in the future) to the retiree while the deduction for points is VERY valuable today (while working).

I'm sure you're banging 'em up in Renton and hope this case study helps. Look up Steve Marshall in Seattle; he teaches some really useful stuff.

Brian: I respectfully still disagree. I appreciate your viewpoint. When I think of a financial advisor I think of a CFP not what we do. If you are a CFP, my mistake. If I'm advising someone not to do something, you could make the argument I'm a financial advisor. I've never really thought of myself as one though. I provide advice on home loans, not on building retirement income, saving money on taxes, etc., etc. I leave that up to the money managers and CPA's of the world. I would like to see the net savings you're talking about. By my calculations, 1/4% better in rate amounts to a savings of $60/month on a P&I payment for a $400,000 loan. A client will probably spend $4000 to do that. In addition are all the other costs associated with the loan (origination, appraisal, etc. etc.). I guess I don't take lightly all the fees charged to the client. Again, I just think that if the client moves or refinances within the first 5-7 years of their loan (and we know that happens pretty frequently-the statistics prove it) they don't really seem to have gained much. And, again, they'll probably draw that conclusion. Especially if they're savvy. Then we gave them erroneous advice that they'll always remember. Thanks again. I respect what you have to say. I know you have a great reputation here. Take care.

GERRY.... . that's funny, dollar and sense, I mean cents... cute, but so true. You make an excellent point. These same people will not recommend points, but they will recommend a refinance... in which a refinance will cost money, no matter how you look at it. Gee, how about getting their rate low enough to where they wouldn't have to refinance again, pay those costs, keep their current term, and not waste money on a refinance. What a great way to look at this.

Here is my opinion on this.... Let's give the borrower a higher rate with no points and if rates go lower, you can then refinance. But wait, you still have to pay for title insurance and possibly some lender's fees. Wait, that costs money and that same money could have been used to pay down the rate to begin with. And now, with refinancing, in most cases, that borrower will lose the amortization.... will go back in term, losing what they gained. hhhhhmmm... I guess these loan officers don't look at this, but then look at the fact that they can now make more money because they just did another deal.

Overall, as many of us have said, with today's spreads, it is cheaper to buy down that rate. Not sure what many of these loan officers are looking at, but that scares me when they can't see and or determine value amongst certain rates... and the spreads. Thanks for bringing this up and thanks for the polite compliment.

DARIN.... . as many of us have stated, it comes down to the clients situations. Do they have extra cash. What are their goals. What are their plans. How can a loan officer ignore all 3 of these things or not ask these questions. And as you stated, giving the borrower options. How can you make an educated decision without good options? Thanks for the very kind words and compliments. thanks, it's much appreciative.

TOM.... . yes, it's a great time to buy points. The spread has never been as good as it has been. To go from 5.0% to 4.5% on a conventional loan and only pay 1 1/8 pts? That's a great and cheap spread. And do get 4.5% for about 1 to 2 pts depending on the loan amount.... wow, that is cheap also.

BRIAN.... . you make a good point which I stated at the end of my blog. So many people think rates will go lower... and more so, just because the gov't says so. Are we going to hang onto every word? Wait and take that risk? When as you mentioned, this is the lowest that we have seen since many of us have been in this business. To get a 4.5% rate for 1 to 2 pts... wow, that's incredible.

Overall, I agree, this seems to be a math problem. The sad part about it, in my opinion, that it's an easy math issue. These numbers don't lie. So I still don't get it, why it's not hard to work out the different scenarios. And thanks for the detailed comment....

Hey everyone... I will get back to everyones comments by tomorrow. I just need to skip to Paul's last comment.

PAUL..... . I am not sure how you are getting $4,000 to buy down a 1/4% in rate. I just looked at conventional rates. To go from 4.75% to 4.5%, it's only costing my client .473 pts. That equates to $1,892 in points to buy that rate down, not $4,000. That means it takes me 2.6 years to recoup the points, to break-even on what I paid to get my rate down to 4.5%. If I am nearing retirement, that's a great bang for my buck. And after 2.6 years, I am now making $60 a month.

Overall, I agree with Brian Brady on looking at mortgages, rates, and points as a financial planner. Even though I am not one, I knopw enough to plan for my clients, to give in depth information, scenarios, and opinions. And to back myself up and to protect myself.... I never tell anyone that I am a financial planner and I tell people to go over this with their financial planners. It doesn't matter what your title is, there will be people that will disagree. Just as you disagree with us, yet I am showing you true and real numbers to back up my advice. All you have said is that it is expensive. And then tell me that it would cost $4,000 when in reality, it's only costing my clients an extra $1,900, which is less than $2,000, which is less than half of what you mentioned as an expense.

Paul... I am not trying to take anything away from you and how you treat your clients. You might have their best interest, because you believe in that. But believing and proving with hard facts are two different things. Again, numbers don't lie, as long as they are real numbers and not figures stretched out to make a scenario look good.

Lastly, don't let someone intimidate you just because they are savvy... or dress well... or have a big name position within their company. Some people have smarts, but not common sense... and vise versa. Those that actually understand the numbers when on paper, those are the savvy ones. I know very successful people that just don't get this. Again, everyone is different. After my 2nd year in the mortgage business, I got wise and put Mortgage Consultant on my business cards.... Not loan officer. That was back in 1994. It wasn't until about 6 years later, that I started to see more loan officers put that on their cards. I am not saying that I created that position, but think about it, it makes sense. I truly believe a great loan officer should wear several hats within the financial industry, having a good understanding on how money works. No, you don't have to have that background, as Brian has worked on Wall Street for 10 years or so.

In any case, you don't have to change your mind. But I truly believe that you are doing your clients a disservice if you don't give them options... explaining how to save more money in the long run. Ever hear the phrase, "it costs money to make money"? It's the same thing when spending money on points to save money, and in this case, that makes you money. And to be afraid to lose clients because you gave them the wrong advice? What if they found out that they could have gotten a lower rate and that it wouldn't have cost them that much. Wouldn't that be like bad advice? And it doesn't have to do with the fact that you have only been doing this for 6 years or so. Even though I have been doing this for 16 years, I had these same thoughts and reasoning's going into the end of my first year in the mortgage business. I wanted to be on top of my game. So instead of learning how to take a very good application, I learned how an amortization works... understanding the differences of paying points and not paying points... asking about the borrowers goals and plans. And overall, learning how to be creative, coming up with great savings plans, just as a financial planner would do. Meaning... I get to know my borrowers. Do they have kids... what grades are they in. How long until college.>..Do they want a 2nd home.. etc etc... this is what a financial planner does also.

Anyhoo... sorry for the long verson. But I had to address your comment now, because I see some things from your comments that seem to be missing. Example... saying that it would cost $4,000, when it would only cost $1,900. That's a $2,100 difference which is huge. thanks for your input and feedback.

When I think of a financial advisor I think of a CFP not what we do. If you are a CFP, my mistake

There is a mortgage designation, accepted by the Financial Planning Association (the CFPs), called CMPS; the training will help you understand this. You can also be trained by NAMB for three designations; that training covers this material. Not all financial planners choose to pursue that designation; some get the education in college or the workplace. I did get the Certified Financial Manager Designation from Merrill Lynch (way back in 1990)

I've never really thought of myself as one though. I provide advice on home loans, not on building retirement income, saving money on taxes, etc., etc. I leave that up to the money managers and CPA's of the world.

The title "Mortgage Planner" was started by Steve Marshall. He suggests that if you call yourself one, you MUST learn the basic principles associated with these disciplines.

By my calculations, 1/4% better in rate amounts to a savings of $60/month on a P&I payment for a $400,000 loan. A client will probably spend $4000 to do that.

Common mistake, Paul. If you calculate a T-I-L properly, you'll see how it works. Read that article on BloodhoundBlog.com to learn the right way to analyze points.

Again, I just think that if the client moves or refinances within the first 5-7 years of their loan (and we know that happens pretty frequently-the statistics prove it)

Flawed stats, Paul. They were compiled during a long-term declining interest rate cycle (1982-2008). That cycle is over. First rule of financial planning; past performance is not always indicative of future results. You gotta ask yourself two questions:

1- Will they be able to sell in three years (at a profit)?

2- Will they be able to refinance (to a lower rate) in three years?

If you think the answer is "yes", then don't recommend the points. I'd be hard-pressed to find anyone on Wall Street that expects lower rates or materially higher home prices in three years, though. 3 years is where the B/E point REALLY is.

And, again, they'll probably draw that conclusion. Especially if they're savvy.

Quite the opposite. The savvy ones know what's coming, Paul. It's our job to educate them how to properly "plan" their mortgage for these altered market conditions. Good Luck!

Jeff, I'd disagree. Mortgage originators are usually the first interaction a family has with financial planning. There is no such thing as a "licensed financial planner" so bone up and get educated ( you already are)

PS: Jeff, if you don't want the links in there, I understand. I linked for Paul.

Jeff is sleeping now, he will be back tomorrow to finish up the comments. Brian, you should be going to bed soon also.

Seriously, Brian, in regards to your last statement, I agree. I know what I am already. I know that you can take certain courses, classes, and get certain designations. I don't know everything, but I know most of it and it was self taught. And I agree, we usually are one of the first to have an interaction with a family when it comes to financial planning. Not as many that don't have homes have financial planners.

In regards to those links, those don't bother me. Just as we want to educate consumers, you are also wanting to educate loan officers. thanks

Wow, what a discussion this is turning into and many excellent points for points have been hit upon and no offense, Paul, but if you truly are conservative, points are the conservative way to go these days. Granted, as has been stated numerous times already, each client's situation is different and paying points, or not, is not always the best thing to do.

Paul, as for being a financial planner, wise and become one. Every mortgage professional needs to because you are issuing your clients the largest debt they likely will ever have and how they manage that debt can determine their financial future. This is the reason I came to become solely a mortgage professional back in 2003, because nearly 100% (probably around 99%) of mortgage professionals were just originating loans and had no clue how to integrate that loan into an overall financial plan and that was wiping out hundreds of millions of dollars of Americans' wealth in the process. As Brian stated, you are likely the first financial planner they have ever encountered, so be one and save them some money, help them create more wealth over time, and then you can truly state you are acting in their best interests.

Now, I must say that as mathematical as this discussion has gotten, I am rather pissed that not one of you, unless I missed it somewhere, brought up another important calculation in the determination of which route is better. Know what that is? That's right, it is the added principal you get over time with the lower interest rate and that can bring the breakeven point even lower. Just check out the amortization tables and you will see that equity builds faster with lower interest rates and that has to be calculated into the cost/benefit analysis as well.

Brian, Jeff, and many others that commented here are doing a great job educating you. Take full advantage of it and demand that level of knowledge from your mortgage professional. Maybe one day every mortgage pro will be knowledgeable enough in financial planning to truly serve the American public, the rest will simply originate loans for what they falsely claim to be the lowest rate and fees.

Jeff, Brian, Robert especially...

you guys should be applauded for your efforts to truly educate. There is no flaw in your reasoning and methodology and it just exemplifies how many different ways we can look at the issue. The most important fact I hope readers can take from this is paying points is an issue that must be looked into!

Paul and others. Having the best intentions doesn't always equate to giving the best advice. Not trying to pick on anyone but if you truly feel points are evil you would do well to pay attention to the advice being offered here by some top notch industry professionals.

To be honest I have often times made marginally less on a loan to afford my customer the ability to take advantage of a quality buydown. I'm sure others that have commented here have done the same. If you think we charge points to make more $, you are sadly misinformed.

Lastly, again not trying to pick on anyone but saying what needs to be said, Kathy and Norma, as Realtors I trust you know your business well and understand how difficult it is for a lay person or even a lender to know the finer details of contract legality. That said, I can assure you with the violent changes occurring constantly in the mortgage business these days, unless you can devote full time effort to our business, you are likely providing a disservice to be giving mortgage related advice.

Gerry Suarez, Jr.

Your FHA Loan Pro!

Thanks for all your comments here. I appreciate your seasoned advice. Robert: The only issue I have with your statement is the one about how mortgage planning is important. I've read Steven Marshall's article and plan. Let's also remind ourselves that mortgage planning occasionally lead to the debacle we're now going through. I think mortgage planning is o.k. in the right hands. Let's face it. We're in a transactional environment and only the mortgage pros. who are looking out for their clients interests first survive. I know all of you have been doing this a long time and bring value. I caution all of us to never lose sight of why we're here. To benefit our client and not just line our pocketbook. If we do that the money and clients will follow. I think sometimes we get it backwards. And Brian, I agree with Gerry. Providing financial advice is a slippery slope. I appreciate the CMPS designation but don't think it substitutes for a CFP designation. In fact, most major financial advisors (think UBS, for example-I have a friend who works there) do not recommend mortgage planning. The liability and risk are too great. Have a great day! Again, Jeff, thanks for the post. It's a lively one. Good job!

Just check out the amortization tables and you will see that equity builds faster with lower interest rates and that has to be calculated into the cost/benefit analysis as well.

Mea culpa, Bob. Amortization tables are an excellent presentation tool for clients. When you illustrate the lower balances associated with a lower rate, it really drives the point home.

I appreciate the CMPS designation but don't think it substitutes for a CFP designation.In fact, most major financial advisors (think UBS, for example-I have a friend who works there) do not recommend mortgage planning.

Paul, the registered representatives are no more "finacial advisers" than you; they're licensed to sell securities and you're licensed to sell mortgages.

The only issue I have with your statement is the one about how mortgage planning is important. I've read Steven Marshall's article and plan. Let's also remind ourselves that mortgage planning occasionally lead to the debacle we're now going through.

Why do you call yourself a "mortgage planner" then?

Brian: I actually changed my title to mortgage loan originator. That is what my license says. Perhaps I din't make the change here. My bad.

Good stuff Jeff. I always like coming to read your blog. I always learn something new. Thanks for posting.

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