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Mortgage Rate Update --- What are points and when should you pay them?

What Are Points and When Should You Pay Them?

Points are up-front fees paid to obtain a better interest rate on a loan. One point equals one percent of the loan amount. A lower interest rate may result in a lower monthly payment, but it is important to consider how long you intend to be in the loan, and to compare current rates to historical market trends.

If you take out a $300,000 mortgage and decide to pay one point, this translates into an up-front closing cost of $3,000. Paying a point up front saves $100 a month but it will take 30 months to recuperate the cost of that point. If you decide to refinance or sell the home before the 30-month mark, your money is lost. In this case, you would benefit financially by remaining in the home longer than the 30 months.

Rates run in cycles. When rates are at historical lows, it is sensible to pay points if you plan to live in the home for an extended period of time. It is unlikely that rates will go down; hence, there will be no need to refinance.

When rates are up, there is a strong likelihood that they will come down. This is no time to pay points. The chances of refinancing in the future are extremely high, and you will likely not be in the loan long enough to recuperate the cost of the points.

Mortgage Interest Rates*

Rates as of 04/16/2007:

	Conforming	APR	Payment per $1,000	Jumbo	APR	Payment per $1,000
30 Year Fixed	6.125%	6.342%	$6.08	6.375%	6.533%	$6.24
15 Year Fixed	5.875%	6.098%	$5.92	6.125%	6.340%	$6.08
5 Year ARM	5.875%	6.082%	$5.92	5.875%	6.093%	$5.92
5 Year Interest Only ARM	6%	6.197%	$6.00	6%	6.191%	$6.00
30 Year Interest Only	6.25%	6.496%	$6.16	6.375%	6.534%	$6.24

*Rates are subject to change due to market fluctuations and borrower's eligibility.

Georgia Residential Mortgage Licensee #21471

Posted by Ramsey Yount on 04/16/2007 12:06 PM

Comments (5)

broker, lenders, rates, fees, loan, products, points, refinance, market, purchase

This post has been included in Georgia Information Gwinnett County, GA Information

5 Comments on Mortgage Rate Update --- What are points and when should you pay them?

APR

2007

Ramsey,

This is great information to have and useful to keep in the Bookmarked section. Thanks for sharing this with us to refer to!

I disagree... you can pay points for many more reasons.

Plus - a point means nothing... 1% from the borrower doesn't always mean - in fact it usually does NOT mean - 1% off the rate... it is usually some fractional amount of a percent.

you pay points also when you're trying to cash flow. The points can help with tax benefits plus when the payment is $100 lower, the cash flows are higher... it all depends on the return you are looking for...

but at this point, rates are low but not the lowest so some people are paying points to drive down the burden of the payment - especially on the Alt-A and Subprime loans out there. 2 points on one loan I'm working brings the rate from 8.5% to 7.125% ( i.e. 2 points = 1.375% off rate)

Hello?? I could swear I have posted a couple of postings here and somehow they don't stay on... Am I doing something wrong?

Ramesy... I will slightly agree with David. First off, David, I can't find where he said that buying 1 pt brings your rate down 1%. He said.... One point equals one percent of the loan amount.

Please don't take what I am about to talk about as rude or mean. I do believe in educating the client here and I think you are misleading the client in several areas.

1st.... rates are the lowest that they have been in over 3 years? Well, they were last month. Slightly up this month. I have been doing this for 14 years and I was able to get my dad a rate of 4.875% once... but that didn't last long. Realistically, this is a good time to buy points... if you can. Why? You don't know where the market will be next year. It could be higher and then you just lost out on that money. Even if the rates went down to 5.25%... you would have to have a substantial loan amount of over 200 k to start making a difference. And if you waited a year? You lost a year.... still would need to pay a point probabally and you would have new closing costs, which you need to factor into the whole equation.

2nd... by paying a point, you aren't wasting your money and the true recapture point wouldn't be 30 months in your example. Why do I say this. As David mentioned, which was the first thing that jumped out at me when I read this post, is that points are tax deductable. If you paid $1,000, you would be able to write off at least $280. So now your break-even point is a little less.

To tell a client that this is no time to pay points is misleading. You need to know their financial history and their goals, before making that statement in public.

This is just my .02 cents. I did a blog on this on 11/06/06. I do not want to post it in this comment, becasue that would be rude. But if interested, please take a look at this. You do bring up a good topic and some nice illustrations. And opinions a great...so is educating clients. I just think this needs to be broaden some.

jeff belonger

Jeff great points... I agree with you and David..

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