Points: "To Pay Or Not To Pay - That Is The Question"

When it is time for you to get a new loan, either by buying a new home or refinancing your existing one, it's important for you to keep your end goals in mind.

With the recent shake up of the financial markets, a lot of KMG Mortgage Group clients have been inquiring as to whether buying points is a good idea.  That depends COMPETELY on your long term goals.  More about that later...

Because it is important for you to know the difference between "Origination Fees" and "Broker Fees" and "Discount Points", let me get a few definitions out of the way before we begin - what a complicated game we play, eh?

Origination Fee - what a Loan Officer charges a customer to do a loan.  This is how a Loan Officer gets paid, sometimes also in combination with a "referral" (for lack of a better term) fee from the lender called a Yield Spread Premium (different post).

Broker Fee - what a Mortgage Broker charges a customer to do a loan.  This is (in essence) the SAME exact thing as an "Origination Fee" with one exception: the Federal government.  Federal guidelines require that Mortgage Brokers call their "origination fee" a "broker fee" - Why?  Because they want it that way.  Sounds typical for the government, doesn't it?

Discount Points - Unlike Origination Fees and Broker Fees, Discount Points (as defined by Federal guidelines) are to BUY DOWN YOUR INTEREST RATE - and for NO other reason.  It is VERY important for you, the homeowner, to know the difference.

Whereas your Mortgage Professional is earning income when you pay an Origination Fee (aka: Broker Fee), a Discount Point is not to be credited to them as income (at least it's not supposed to be).  If your Mortgage Professional is making money on your Discount Points, you need to HIGH TAIL IT OUT OF THERE and find someone else!!!!

So, to address the issue at hand: should you pay Discount Points to lower your rate?  Again, it depends entirely on your long term goals.  Let me give you a real life example:

Borrower is purchasing a new home for $210,000 and putting 20% down.  Their new loan amount will be $168,000.  Both loan options below are based on a 30 year fixed rate without mortgage insurance at today's rates - and do not include taxes and homeowner's insurance.  All other fees being equal (EXCEPT IN OPTION #2 THERE IS ONE DISCOUNT POINT), this is what you have:

In example #2 above the borrower is paying "1 Discount Point" (which equals 1% of the loan amount) and he/she is spending $1,680 dollars now to save $40.62 a month.

Does this equal a good loan?  Remember your goals?

At this rate, in the above example, it would take this borrower 41.36 months (almost 3 1/2 years) to make their money back.  So, if you plan on being in this home, and keeping THIS loan, for 3 1/2 years, then YES this is a good deal!  If not, you don't want to pay discount points.

Still not sure?  Let's look at the life of the loan.

Example #1, if paid off after 30 years, will cost you (in terms of principal and interest) $372,384.00.

Example #2, if paid off after 30 years, will cost you (in terms of principal and interest) $357,760.80.

So, by paying $1,680 now,
you save $14,623.20 later.

So, when paying buying discount points, it is always important to think of your long term goals.  But, let's be realistic.  You don't have a crystal ball and neither do I.  Who knows what's going to happen tomorrow, let alone in 3 1/2 years from now.  Right?  The best you can do is make an educated decision - which is our goal here at KMG Mortgage Group.

The more you know and understand the process, the more comfortable you become.  Which is, let's face it, in OUR best interest, too.  Because that's the only way you will send your friends and family - if you trust us and know that we have you in mind.

Best regards to you and your family.

Maryellen Garasky
Mortgage Broker
KMG Mortgage Group
(208) 664-3600
(509) 638-3455
www.kmgmortgagegroup.com