By Dustin R Burke, Adonai Financial
I recently read a post by Christopher Hill titled “Do I pay a point or not?” I work with clients from all over the world and the American’s have been taught NOT to pay points, while the remainder of the clients I work with WANT to pay points. I posted a blog on “ARM or not to ARM?” where I also stated that Americans wanted a 30 year fixed and not an ARM while clients from abroad wanted the opposite.
Points, just like ARM loans, must be used correctly. Here are SIX real life examples - three on fixed rate mortgages / three on ARM mortgages.
***When a borrower chooses NOT to pay points then we will apply what he/she would have paid for the point(s) and place it toward the loan amount.
Fixed Rate Mortgage Examples: this real life example is based on a 30 year fixed.
Option 1 – In this option the borrower is paying 2 pts and getting the lowest rate.
| | Interest paid after: | Total Cost w/ points | Costs vs. Option 2 | Costs vs. Option 3 |
Loan Amount: | $300,000 | 12 mo: $17,899 | $23,899 | +2094 | +4150 |
Rate: | 6% | 24 mo: $35,572 | $41,572 | +1154 | +2292 |
Points: | 2 ($6000) | 36 mo: $53,003 | $59,003 | +211 | +425 |
Payment | $1,798 | 48 mo: $70,178 | $76,178 | -735 | -1448 |
| | 60 mo: $87,082 | $93,082 | -1683 | -3325 |
Option 2 – In this option the borrower is paying 1 pt and taking a slightly higher rate.
| | Interest paid after: | Total Cost w/ points | Costs vs. Option 1 | Costs vs. Option 3 |
Loan Amount: | $297,000 | 12 mo: $18,835 | $21,805 | -2094 | +2056 |
Rate: | 6.375% | 24 mo: $37,448 | $40,418 | -1154 | +1138 |
Points: | 1 ($2970) | 36 mo: $55,822 | $58,792 | -211 | +214 |
Payment | $1,852 | 48 mo: $73,943 | $76,913 | +735 | -713 |
| | 60 mo: $91,795 | $94,765 | +1683 | -1614 |
Option 3 – In this option the borrower is not paying points and will take the highest rate of the three Fixed Rate options.
| | Interest paid after: | Total Cost w/ points | Costs vs. Option 1 | Costs vs. Option 2 |
Loan Amount: | $294,000 | 12 mo: $19,749 | $19,749 | -4150 | -2056 |
Rate: | 6.750% | 24 mo: $39,280 | $39,280 | -1138 | -1138 |
Points: | 0 | 36 mo: $58,578 | $58,578 | -425 | -214 |
Payment | $1,906 | 48 mo: $77,626 | $77,626 | +1448 | +713 |
| | 60 mo: $96,407 | $96,407 | +3325 | +1614 |
Fixed Rate Assessment: It appears that Option 1 is best if the borrower is going to keeping the loan for 3+ years. Option 3 appears best if the borrower is going to keep the loan for less than 3 years. And Option 2 will save the borrower on upfront expenses vs. Option 1 and give the borrower a lower monthly payment than Option 3.
From my vantage point, for an investment longer than 3 years Option 1 appears to be the best of the Fixed Rate Mortgage Options. For a short term investment Options 3 appears to be the best choice.
Adjustable Rate Mortgage Examples: this real life example is based on a 5/1 ARM.
Option 4 – In this option the borrower is paying 2 pts and getting the lowest rate.
| | Interest paid after: | Total Cost w/ points | Costs vs. Option 5 | Costs vs. Option 6 |
Loan Amount: | $300,000 | 12 mo: $13,775 | $18,775 | +313 | -1601 |
Rate: | 4.625% | 24 mo: $27,327 | $32,327 | +1403 | +1798 |
Points: | 2 ($6000) | 36 mo: $40,654 | $46,654 | +2106 | +4185 |
Payment | $1,542 | 48 mo: $53,727 | $59,727 | +3813 | +7576 |
| | 60 mo: $66,533 | $72,533 | +5523 | +10968 |
Option 5 – In this option the borrower is paying 1 pt and taking a slightly higher rate.
| | Interest paid after: | Total Cost w/ points | Costs vs. Option 4 | Costs vs. Option 6 |
Loan Amount: | $297,000 | 12 mo: $15,492 | $18,462 | -313 | -1288 |
Rate: | 5.25% | 24 mo: $30,760 | $33,730 | -1403 | +395 |
Points: | 1 ($2970) | 36 mo: $45,790 | $48,760 | -2106 | +2079 |
Payment | $1,640 | 48 mo: $60,570 | $63,540 | -3813 | +3763 |
| | 60 mo: $75,086 | $78,056 | -5523 | +5445 |
Option 6 – In this option the borrower is not paying points and will take the highest rate of the three ARM options.
| | Interest paid after: | Total Cost w/ points | Costs vs. Option 4 | Costs vs. Option 5 |
Loan Amount: | $294,000 | 12 mo: $17,174 | $17,174 | +1601 | +1288 |
Rate: | 5.875 | 24 mo: $34,125 | $34,125 | -1798 | -395 |
Points: | 0 | 36 mo: $50,839 | $50,839 | -4185 | -2079 |
Payment | $1,739 | 48 mo: $67,303 | $67,303 | -7576 | -3763 |
| | 60 mo: $83,501 | $83,501 | -10968 | -5445 |
ARM Assessment: It appears that Option 4 is best if the borrower is going to keeping the loan for 1+ year(s). Option 6 appears best if you are going to keep the loan for less than 1 year. And Option 4 has not real substantive advantage over Option 4 or 6.
From my vantage point Option 4 appears to be the best of the ARM Options. For a very short term investment Options 6 appears to be the best choice.
Best overall: Given that most mortgage loans are paid off every 3 – 5 years either by refinances or the sale of the property Option 1 and Option 4 seems to be the best. Both options also pay the most points.
And, after further evaluation Option 4 offers savings over Option 1 of $12,349 after 36 months, $16,451 after 48 months, and $20,549 after 60 months. So, if a borrower can risk the rate adjustment I would typically recommend Option 6 – an ARM with points.
What are you thoughts on points? Do you agree or disagree? Let me know by sending me an email to dustin.burke@adonaifinancial.com.
"Adonai Financial, your friends in the mortgage business!"
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Copyright © 2008 Dustin R Burke | All Rights Reserved
Portions Copyright © 2008 Adonai Financial Corporation | All Rights Reserved
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Adonai Financial Corporation
http://www.adonaifinancial.com/
---The content of this blog is my opinion---
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