Yes, let us now enter into the wonderful world of paying points (or not paying points) when getting that loan to buy or refinance a home. Before I go into my piece of advice though, I should explain how I make money as a Mortgage Broker (wait for shameless plug..........) here in beautiful Allentown, Pennsylvania.
On the mortgage side of things, we make our money one of two ways. Wait... I'll reduce this to how Mortgage Brokers make their money. I'll let Mortgage Bankers, Direct Lenders, etc... be transparent about their profit margin (though it is eerily similar;-). As a Mortgage Broker, I make coin by either charging fees on the Good Faith Estimate (Broker Fees, Origination Fees, Processing Fees, and the like) and/or in charging a higher interest rate in which case the lender pays me. The latter is what is known as Yield Spread Premium. Mortgage Brokers disclose it, Bankers don't have too.
Still with me? Let's say my company wants to average 2% on every transaction we close. I can charge you a 1% origination fee on the Good Faith Estimate and bump up the interest rate a smidgen so the lender pays me 1% on the back end. Or, I can charge you 2% origination on the Good Faith Estimate and give you what is known as the par rate (which is simply the very lowest wholesale rate you can get without paying discount points directly to the lender to buy it down further.) Let's say that you want one of those "no fee loans"... then I'll simply bump up the interest rate so that the lender pays me the 2%. When you deal with a Mortgage Broker or Lender, everything is negotiable. I've made loans for 1% and some for up to 4%. That depends on a lot of factors, to be discussed at a later date. Do also remember, my time and service are not negotiable.
What does all this mean? Unless we go back to the bartering system (in which case I have a killer set of fine china)... we are all making money in our respective professions. So, now that you get the gist of how we make our money, onto the wonderful world of paying points and whether you should or shouldn't.
Whether you are buying a home or refinancing a home and plan on being in that home for a long time, you are probably better off paying points to get the lowest rate possible. Why? Quite simply, the money you will save with a lower rate will recoup that fee and then some. Plus, you'll be paying a bit more towards your principal balance. Brief example as follows:
- You are taking a loan of $200,000 and you plan on being in that home for at least 10 years. Let's say with no points you can get a rate of 6.25%. But, if you pay 2 points ($4000.00 or 2% of the loan amount) you can obtain a rate of 5.75%.
- On a 30 year fixed mortgage, your principal and interest payment on that loan with a 5.75% rate would be $1167.15. Conversely, your payment with a 6.25% rate would be $1231.43. That's a savings of $64.28 a month. That's a annual savings of $771.36. Well, to recoup the fees you paid to the man or woman behind the mortgage, you'd have to be in that home for at least six years. Make sense?
On the other hand, if you are only going to be in your home for a short time, you may go a different route. Let's say you are buying a home and really only have enough money for the minimal down payment and applicable closing costs. In that case, you may ask your loan officer (until I get a badge, I hate that term) to waive his/her fees on the front end. That will translate into a higher rate. But it will also keep you from dishing out more money at the closing table.
Let's say you want to refinance your home to get some cash-out for home improvements. Perhaps you plan to turn around and sell the home a year or two down the road. In that case, it may also make sense to pay a little bit of a higher rate and reduce fees on the front end so you aren't eating at your equity with those costs.
Again, consult your Mortgage Professional and run the numbers. If you need one and are buying in or refinancing in Pennsylvania (shameless plug ahead.....) I'm your boy man. Situations are different and your loan program should reflect what makes the most sense for you. This is truly a case by case basis. What makes sense for Uncle Henry or Neighbor Jane, may have nothing to do with what makes sense for you.
I've outlined some brief examples of where paying points may make sense and other situations where... well, not so much. Understanding how we make our money is important. Understanding how to make the best use of yours is even more vital.
Posted by 
Behold a Pale Horse...
;)
;)
Jason,
Pretty straight-foward and to the point ! Spells it out quite clearly. There always seems to be some sort of debate about mortgage closing costs and so forth. It is funny though how some mortgage brokers might bait and switch someone either by offering a lower rate (but having higher fees) or having basically no fees (but a higher rate). Is all good !