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The Myths about ZERO point mortgages instead of paying points upfront……

money

I have been doing this for a little over 14 years now. When I first got into this industry, sure, I was green….brand new. Sure, I had classes in High School and College in regards to financing, economics, managing your money, your typical math classes, and even some accounting classes. But what got me were the lawyers and the accountants that told their clients not to do mortgages with points associated to them. Or the typical family member and your next-door neighbor that got this great deal with zero points and that this was the way to go. Even the talk radio shows that might have been talking about one specific thing in regards to points and zero points, but that you came into the middle of the program.

house

One of my first questions when speaking to a client, refinancing or purchasing, is what their goals are for the near future and their long-term goals. Now, many of us don’t have these so-called crystal balls that many claim to have. Things can happen at any time. But I have a lot of passion in what I do and I care what I do, helping those clients to achieve their dreams. And by giving them options in what kinds of programs there are and the costs behind these programs, I can help them achieve this dream and their goals.

calculator

This sometimes can be simple math and not the calculators online that tell you if you should refinance or even buy a house. These calculators are a formula made up by someone’s calculated guesses and certain factors included. I am not looking for the typical answers of; “I want Zero points” and “those no cost loans”. Just because the client says that they want this type of loan, doesn’t mean that it fits their needs.

I am going to use an example in regards to someone purchasing a $200,000 house with no money down. Let’s keep the example simple by stating the only closings costs will be zero points or with 2 points. And for those that might not be putting more than 20% down, please read my previous blog: PMI (Private Mortgage Insurance); why you need it and the different types of PMI……

EXAMPLE

ZERO POINTS 2 POINTS

Loan Amount $200,000 $200,000

Int. Rate 6.375% 5.750%

Cost of Points $0.00 $4,000

Monthly $1,247.73 $1,167.14

Payment P & I

Part 1

At this point, the difference of payment is $80.59. Let’s assume that you are in a 25% tax bracket for income tax purposes. You need to consult your accountant on the different tax deductions when it comes to purchasing and refinancing. Keep in mind that this is a purchase transaction. You can write off the full amount within your tax bracket as opposed to when refinancing. So your calculated savings will be $1,000 next year. Now your cost of the points is $3,000. Keep in mind that you are saving $80.59 a month. When dividing this into the cost of $3,000, it tells you that it would take you 37.2 months to recoup this money. Your break-even point now becomes 3.2 years.

Part 2

Here is where so many lenders fail in educating the average client or where the client doesn’t see the true savings. You also have the amortization of the loan.

If you kept the loan for 5 years at 6.375%, your principal balance would be $186,950.49. If you were paying 5.75% for those same 5 years, your principal balance would be $185,524.37. This is a difference of $1,426.12 savings by paying 2 pts to get your interest rate lower.

In closing:

Again, these are examples and not including other lender costs or even mortgage insurance depending on your down payment. This comparison is just for informational purposes in explaining how points and no points work. And yes, you would need that extra money to even buy the rate down. This doesn’t always apply to everyone because of the money issues. And it also comes down to your monthly and yearly goals, may it be short term or long term. But this is a good dissection of what your money can do for you and how it can work for you. And one of the old MYTHS of points is that the lender is making more money. This is not true at all, as long as your lender is comparing true apples to apples.

***These rates and points are an example from 10/06/2006 for a 30-day lock. It all depends on your income and credit qualifications in order to get these rates.***

Posted by Jeff Belonger -- The FHA Expert.com -- FHA Loans -- FHA mortgages - USDA loans on 11/06/2006 11:21 PM

Comments (45)

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45 Comments on The Myths about ZERO point mortgages instead of paying points upfront……

NOV

2006

There really isn't much to add here.

The old Midas slogan..."Pay me now or Pay me later?"

Great blog; very intuitive

Nice refresher. Could always point this out, using your example, to clients!

Great post Jeff. I look forward to many more. -Charles

Excellent post, Jeff. I learn so much from your posts. Makes me realize how little I really know about my own mortgage.

Great comments and "on the money!"

One of the challenges in presenting this analysis is making sure your clients have the necessary cash to invest in points before you get them "sold" on this concept.

Jeff, great post. I can easily tell that your "modus operendi" and mine are pretty much the same. No doubt that many of our clients come to us with pre-conceived notions about "Points" and other loan terms based on what they have read or been told. Early in my discussion I come to the point "What is most important to you in completing this transaction?" Bottom line is that nothing is for free....particularily the "no closing costs" loan. To me it is no different than the hype and spin of the politicians.

If you demonstrate true professionalism and a genuine interest in the welfare of your client by taking the appropriate time to explain the options, advantages and dis-advantages , no sugar coating just facts then you will earn their trust and business. If you can't succeed after this, then it's time to step back and re-evaluate your approach and commitment to the business. Seldom do I ever have an issue with points and costs. Frankly, I am often asked if I have the best deal for them. My response is always the same; What I am offering you is very competitive, if you shop long and hard enough you will find someone "cheaper" and some more expensive. Cheaper is not necessarily better! Service, commitment, honesty, etc. is an integral part of the "value-received."

Jeff: Nothing to add to this post, very nicely put. I do want to say that I usually tell my clients to speak to their CPA about PART 1 and I speak more about PART 2 with my clients. Very easy savings calculations that an average consumer really does not know about and it is our job to explain to them their money saving options.

Brian...... so true in regards to pay me now or pay me later. But in this case, the paying me now could save them more money of they stay in the house at least 5 years.

Kaushik....... thanks, just make sure my name is on that refresher.... lol :o)

Jacqulyn......... Charles....thanks for the compliment.

John........ like I tell everyone, I am not an accountant and to always talk to someone. But I can certainly point out the basics. I am not sure where you see that I said they can write off the full P & I ???

I tried using a simple illustration of them paying $4,000 in pts, but able to write-off 25% of the $4,000 even if they are in the low end of the tax bracket. On a purchase, they can write-off a percentage the points in the next tax year. On a refinance, they can usually write-off these points during the course of the loan, a small percentage per year. ....not the full amount.

Last....I did mention that paying points is for the long term....but define long term. If you look at my example, you only need to be in the house for 4 or more years.... Actually....3 years. So again, define long term? So many thing recouping points takes over 10 to 15 years. But thanks for your input.

Mary........ just like I learn so much from your blogs and posts. Actually, I had to buy 5 packets of paper just to print them all.... LOL

Jamie Chafin......... thank you very much for the kind words. And I agree.... but once you know their financial status and what they can actually use, this helps determining what is good for them.

When I speak to a client, I have a 2 part question to their asking about their assets. 1. How much money do you have total.... savings, checking, 401-k, IRA.....etc etc 2. Of this, how much do you want to spend, and not ZERO... lol

Ron......... nice to see you stop by. I think your first time in my blogs? ;o) I have read several of your blogs and I am gald that we think a like. Thanks for the great feedback.

Nima........ thanks for the thoughtful comment. And yes, we agree.... speak to your accountant. I just let them know about the basics. When they start asking more detailed questions, then that's when I put the hand up..... "accountant" ;o)

Great point! I like the Zero Points choice when you are only going to keep the mortgage for a short time.

Good post Jeff, all mortgage plans are different and have different pros and cons depending on the situation of the borroror. Hard to give definitive info since there is always another way to look at. Points or no points? Depends.

Jeff,

Great post and very informative. Simple math is great, and I know you wanted to keep it simple. Also, I know you know what I am going to add anyways, you did point it out regarding calculations.

I am a very analytical person, always trying to find better ways, that's the pilot in me. So, you see, I had to take it to the next step, not to confuse what was said, because simplicity is great, but to highlight that no two borrowers are alike and there are more ways to look at this picture than just simplicity.

The smart person, after paying points would invest the monthly savings into a safe secure vehicle, and in that capacity, it is relatively easy to find a 6% rate of return, so that is what will use...

Now at the 36 month point, the borrower would be $4,025 dollars ahead of the game. Part of it is due to the investment, but there is yet another aspect to factor in. Actually I am going to do a blog about that instead of putting it here.

Also, what about if the you took the $4,000 and invested it, now where would we be? Now the net worth comparison would be about the same again, leaning a little toward the Zero Point loan at the 36 month point, but switching back to the paying points shortly thereafter.

Again, I know you know this and were keeping calculations simple, but thought I would add this as well for thought.

Again, great job with this post.

It gets worse if the lender artificially inflated the rate, that the borrower would then 'buy down'....smoke and mirrors.....beware...

Clean, clear and to the point ... good post

Tommie...... I agree to a certain point. Sometimes it comes down to the loan amount, because the payment could have a smaller spread in the savings category. And depending on the amount of points then.

Jennifer..... thanks for stopping by. Again....zero points might hurt you more than you think, even in a so called short term. You have to way out certain factors. Basically it comes down to your rate of return.

Bryant...... thanks for the kind comment. You basically said it in one sentence. ALL mortgage plans are different. And too add something, ALL people are different, with different needs and different goals.

Robert........ I was waiting for your reply. :o) Thanks for the feedback.

And that's a great point in regards to what you can do with the $4,000 upfront. I didn't want to add this into the blog, because that is a whole other subject that I am sure you will speak about.

Jeff......... many of us know this. I know we are here to educate the general public. You stated "smoke and mirrors"..... but why talk just in a negative manner. I always try to point out the positives and the negatives to all of my clients. I do appreciate your input. And I agree.... the public needs to know how other lenders bait and switch.... smoke & mirrors.... but just because you pay for something, like $4,000, doesn't mean it's bad for you or that we are making more money.

Michael.... thanks for that clarity of what a few have said & the compliment... "simple...and keeping it simple." thanks

Not trying to be negative Jeff....just trying to add to your already solid post :)

The 'inflate to pay down' points strategy is very common...The internal creation of 'pseudo discount points' as many lead aggregators and bankers do, are getting themselves into hot water.

Geat blog, This why I always tell my clients you can pay me now or you can pay me latter but your money is best spent paying me now if you can afford to.

Great post, you have a good way of getting examples that can be passed on easily. Average people seem to get a bit insane when it comes to loans, always looking for the best deal and rarely understanding the whole picture. Thanks!

If you are in a market like mine why not have the seller pay the points? The buyer still gets the write off, correct? Thanks for the info.

Jeff, I agree with you on educating the client to their options. More often then not the client is taking advice from a trusted family member or friend. Their advice is usually "don't pay points!." In these situations it is usually the math that gets them to see the value in each option. Something their buddy never had laid out for him.

Good Blog Jeff! I have written about this topic in a few articles on a local level. No two clients are alike and it's important to look at each on an individual basis....

Have a great day!

Scott

Jeff Corbet...... hey... debate is good.... healthy, and I do appreciate your insight. And you are correct in stating what you said. I just like for people to look at it as a whole... thanks.

Caryll..... not always if they can afford it, but more so if it makese sense. Thanks for dropping by.

Peter...... thanks for the flattering comment. Like I have said in the past.....try to keep it simple. Many clients don't have the patience sometimes.

Timothy........ AWESOME point made.... something I didn't get into and actually left out. But not on purpose...but I didn't want to make this a book.

Timothy talks about the seller. On some programs the seller can pay up to 3% and sometimes 6% of the closing costs. If this can be negotiated into the deal, then this is to the borrowers advantage to reduce their payment. But not neccessarily for free. Meaning... you might have a slightly higher loan amount than if they didn't pay for the points. But that can be discussed later. And REALTORS... I hope the negotiated statement didn't raise any hairs.... ;o)

But in regards to what you can write-off from what the sellar pays: you can write-off any points that the seller pays also. Again, talk to your accountant.

Dennis...... thanks for pointing this out again. This is key. I do a lot of business with friends and family. Some say don't do this.... but it comes down to trust and knowing what you are talking about. Good point and thanks.

Scott........ thanks for the compliment. Yes, no two clients are alike.... this is so important when describing to a client who is emphatic that their friend and or neighbor got this rate...with no fees. I would ask.." do you know their credit scores? Assets? Income ratios? " Like you said...everyone is different.

Great post Jeff. I also like to educate my clients on their alternatives, even when they don't ask for it. It is part of our fiduciary responsibility to them.

But after the education ... it's their decision.

Great post Jeff, I'm sure it will help a bunch of people better understand how points work.

Tommie...... Just my opinion, but I don't think Jeff Corbett was talking about what lenders actually make, the pricing or back points....which is called the YSP. He had another blog in regards to this which has some good information.

The basis of this blog was to just educate on how points work... and how it can not only lower your payment, but possibly be a better investment all around.

Keith....... thanks for the compliment. I will say this though, from a lenders perspective, it's really not their fiduciary responsibility. Nor is it the loan officers.... but I do take it personally and wil lead the client down the right path. That's how I get referrals. The fiduciary responsibility is a whole other topic that needs explaining and detail. But thanks for the comment.

Leo...... thanks for the kind words. I do hope people better understand this. I love what I do, but I hate the negative phone call that says... Client: " I WANT ZERO points." Me... "why is that sir?" Client: "Because it's cheaper...." NOT true at all....like we have talked about, it depends on their goals and what assets that they have.

Angela....... hey you. Call me tonight. But you are right, the general public just don't understand for the most part. And this is not saying that they are not educated, but this is why they come to us, professionals in the industry. The problem with this is that not every lender will treat them like you and I. And I can say this because I know you and how you treat your clients.

Last....it's also because of perception. What others tell this client at the time, that might be advice, that would come from family members and such.

Jeff, there are times when I have a Borower that is selling a house and purchasing another one, and are making a big profit on the house that they are selling. So this means that 20% down is no problem, and in fact they want to put down a lot more than that in order to reduce the mortgage payment. One of my illustrations is to show them how much every additional $1,000 will reduce their monthly payment by once they have 20% down. I then show them how much their rate can be reduced by each $1,000 they spend towards points, and what it reduces their monthly payment by. They quickly see that the points are usually a better use of their money.

Tommie.... not a problem. And maybe he was talking about this a little. I think it was in between... ;o) It was a tweener....

George... perfect. I tell my clients the same. They are so shocked that putting more money down, $10,000 to $20,000 should make the payment drope drastically. But it doesn't. And that I can take $5,000 of 10k and drop their payment more and save them $5,000.... and still have a tax write-off. There are so many different scenarios....but isn't the reason that why we are here?

NOV

2006

This is a 5 in my book! Right on Jeff!

You are doing math and somehow I understand it! TY ! Maybe it gets down to the mindset of so many who say why would I spend an extra 2k now when I can just owe it later. Back to the spending more than you have issue, yes? I love that you can sit and explain this to people. Your clients should be very appreciative. Good post!

.....I was speaking of the old YSP dipsy do, inflate the rate for borrower to then 'buy down', aka pseudo-discount, for broker enrichment...

Interesting Tommie...Texas is one of those States with some unconventional statutes in its mortgage law compared to the others...well every State is a little different but you get what I mean...

I appreciate your tax related strategy...alas, you are also correct in stating the practice and terms are often abused, leaving the borrowers head spinning into confusion...

Jeff,

I just wanted to add one more thing that may need clarity regarding points.

Points in general are tax deductible (purchases and refis differ in how), but there are scammers out there that charge "points" that are really only covering closing costs instead. These "points" are not tax deductible, since they are covering ordinary expenses associated with the loan.

So if you are paying points, but you are not paying closing costs (at least not the normal amount for your loan, be very careful about deducting those points.

Just wanted to clear that up so people are aware that points are not always tax deductible.

Nima.... thanks for the vote ... much appreciated.

Carole...... thanks for the extremely nice compliment. I just want to treat my clients the way that I would want to be treated.

Jeff..... I got most of what you were talking about. it's sometimes hard on here or in words in general. Face to face always worked for me better. ;o) Thanks again for the input and in what you bring to the table.

Robert...... thanks for clearing that up.

NOV

2006

The points post is so timely with a changing market. There was a time (not too long ago) that we quoted all loans with points (at least three) and were doing 3-2-1 buydowns with the seller picking up 4-5 points to get buyers into the house.

Great job Jeff, I needed the refresher... it's so easy to get used to the status quo.

Moo

Angus.... thanks for that awesome short comment. Direct...

And thanks for the umbrella..... my mom got a kick out of it. I just didn't have time to write or call. thanks and Moo on...

DEC

2006

Don't you just love when they come into the appointment and say "I don't want no points in my mortgage." Like you I always have them examine their goals and plans for the futire to determne if this really makes sense. At the end of the appointment they often say, we didn't know there were loan officers like you.

We often get handcuffed by those that don't know...yet advise clients. Jeff, this was a great post.

Thanks.

John.... thanks for the awesome compliment and your comments.

DEC

2006

Well said... this is so true.

Neil.... yes it is...the myth that is... thanks

FEB

2007

great post it's a great reminder for people in the industry and i hope that our customers and everyone on active rain educates themselves on this topic....

FEB

2007

George..... thanks for stopping by and for the compliment. Are you an AR member? Just someone stopping by? thanks again

APR

2007

Jeff,

This is why I always defer customers to their mortgage specialist. We specialize in Real Estate and just like we don't expect the mortgage reps to specialize in Real Estate, we don't attempt to specialize in Mortgages. We do like to know the basics though and this is an excellent post on how to translate the basics to customers. Bookmarked!

APR

2007

I just had a client tell me that RATE was the most important thing to her. I always push PAYMENT as the most important... but I was actually excited for HER when she told me she'd be willing to pay up to 4 points! to get a better rate!

That helps me take her right to the bottom of pricing and get her really competitive rates even if her profile and credit aren't that great

APR

2007

Lisa..... I think this is a good practice, because I have seen realtors get involved in regards to the financial side of things and it can confuse the consumer sometimes. Thanks for your input.

David..... I agree.... payment is so key.. what can you afford. Sure, rate is big and makes your payment, but you aren't paying the rate per se. For some people, it's more of a bragging right. But can they handle the payment. Thanks for sharing.

MAY

2007

i try and always do 1 pt orig and 1 pt YSP

i always see what the borrower can afford of course

DOMINICK GACCINO

First Suffolk Mortgage Corp

JUN

2007

Jeff- I love this Blog! The other day, I was at bank of America and noticed the No Closing Costs sign. I turned to my husband and said, "Look honey! A no closing cost loan!" Just then, the teller turned to me and says..." Would you like to talk to someone about this type of loan?" And I say, " No thank you Miss, I am your competition, I know exactly what is going on."

If it sounds too good to be true, it is to good to be true.

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