Discount Points? What’s the Point!!!!!

On one of our properties, we are offering that the seller pays points so the buyer will get a better interest rate.  My seller asked if I think that will help the sale.  I told him if you home is in the top three, it might sway a buyer because their monthly costs would be lower.  In this case, the buyer doesn't have to worry about breaking even since the money is from the seller.  Sherry

My favorite comment by buyers:

"I don't have to pay discount points because i know they are junk"

When asomeone acts like that, they do themselves a disservice.

Marie...  I can understand most of your point. But while being in the mortgage industry for almost 15 years, I will have to disagree with some of what you mentioned. If you do the math and do it often, the break even point is usually 4 1/2 years. You also need to add the tax benefit into this equation. Sorry, but I just am a stats guy and try to be more precise, especially if we are writing about educating the client. Sure, we aren't talking about being exact, but being in the ballpark is how I try and educate clients. So many give stats that are misleading, but you then get people that comment, that say.... great info... sounds good. I learned a lot. But did they really?  If the info is off and not just by a little. Don't get me wrong, not saying that you are doing this. 

And your definition of discount points?  vs hiding other fees?  Some of this in my opinion is false or misleading. Yes, points can buy down the rate. But so many charge a commitment fee and application fee. But if I put these 2 fees into the discount point section, I am now better than that other lender. Even if the dollar amount to the consumer is exactly the same. They get to write off a certain percentage of this depending if it's a purchase or refinance. So, I am better. Also....  everyone needs to make some sort of profit and if the client wants a lower rate, my profit will be in the discount points at times. Every single person is different, meaning difficulty or loan...service, etc etc. So... points will be different for each person. Just my opinion.

At the same time, while reading this, I almost felt like the lender charging the discount points was making nothing and just buying down the rate. And in all honesty, you have me totally confused about state laws that were passed, stating if my discount points didn't buy down the clients rate, that this was not legal. Not trying to sound rude, but where did I miss this?  What law was this?  Remember, when writing about this, make sure that you state where these laws count, if they do. So many states are different. Now, I know many states passed laws that state that a lender can't make more than a certain percentage, which is to include closing fees, commitment fees, and points. Is this what you meant? 

Overall, you overall point is good. But when I break this down, I find a few things that I disagree about and I think it can be misleading. thanks, jeff

Marie...  I am not going to win friends here because I will speak out on blogs. And unfortunately I sometimes don't say it in the best of manners. Maybe that is my passionate side speaking.

But here is my whole point in case. JR says great post. You broke down the points systems well. I think you touched on a good topic. I think you pointed a few good things out. I still disagree on some things and how they were mentioned. I go and read JR's description on his profile and here is what he states....  At TJC Mortgage we guarantee the lowest rate, lowest closing costs and a fast closing.  Sorry, but you just can't guarantee this. We all know this is to get clients to chime in, to call, or to e-mail. But this slightly solidifies my comments in how we need to educate the average consumer and not just talk to them in terms that they want to here. 

So, I question people like JR, if they read this post word for word and truly understand it and not from a realtors perspective. Because realtors sell houses and this post would sound great to them. I still have an issue with how you talk about points.... you make a general statement. People read these from all states. If I write something  that is state specific, I am going to mention this. I guess I am a stickler for this kind of information because in reality, we are misinforming the average client on a national level. If a client that I am dealing with in NJ reads this, that this doesn't pertain to them, they are going to question me to death. The problem with this is that many people, myself included, when not an expert in a certain field, will first believe what I read....until I do research. And if your research isn't backed up by good information, then what you read originally might sound correct and or legit. This is a national problem. Just like when people hear their fathers give them adivce... even if their father was successful, knows a lot, but not everything... they will tend to listen to them first.

I will challenge people.... not trying to say that I know it all. But I still think there are some holes in regards to some statements made both in the post and in some of these comments.  And if we are afraid a post will be too long by giving good detailed information and not bits and pieces, then write a 2 part blog on this stuff.  Get specific. A hole?  How long it takes to recoup points.... 5 to 10 yrs?  And then not talking about the write offs. Lastly....you do bring up some good question, in the 6 that you ask and talk about. But throwing numbers out there....   like I said, I am more of a stats guy and I am not here to pick you or your post apart. But we do need define stuff like this if we are going to talk about it.  thanks

Marie...Many comments have hit on the areas that you had omitted in the original post.  Namely, there are many advantages of paying discount points and thatthe "recovery" time is less than 4 years, especially when looking at the tax benefits. 

Are they worth it?  Your title says no (by the way, I like the title).  However, the reality is like every other borrower's situation.  It depends!  I do not use that as a "scapegoat" clause, but rather that it is the only way to truly state it.  There are many factors that go into analyzing a borrower's needa and what is their best solution.  So many so that I cannot list them here. 

Your questions at the end are a good start.  Many of the comments add some needed information as well, but more information is still needed to obtain from the client.  I liked the post overall and commend you for laying it out there.  Knowledge is king, as you stated, and I am sure you will be able to expand on this post further in the future.

Jeff - I don't agree .... 4.5 years is an extreme and it all depends on what the strategy is.  4.5 years - maybe for 2 points but for one?

Marie - biweekly payments and 1% ... I wouldn't recommend anyone quote that out.. that's a lawsuit waiting to happen. 

Points on a loan are prepaid interest ... there are people that benefit paying it up front.  The problem is just as stated above there are many people who think they are junk fees.  It isn't about creating a fee... it is about showing someone how prepaying some interest will benefit them in the short and long run.

In no way does biweekly payment equal the same as buying a rate down. 

David... do the math on many scenarios.  The average comes out to 4.5 years... 1 pt, 2 pts...  it does depend on what you compare it to....  but not 5 yrs and especially not 10 yrs. And if you put someone even in a scenario like that, you should be shot. You can disagree, but numbers don't lie.

Question... if 4.5 yrs is an extreme, which way is your pointer pointing to?  Less than?  Greater than?

I do agree that you shouldn't be mentioning a 1% difference. As you stated, it's prepaid interest. 

Marie....  sorry, but you totally lost me. The first buy down was .125%?  Do you know how many buy downs are?  You aren't telling me what their original balance is. What their new balance is...  what costs are involved. What their old payment was and what their new payment is. That was half of my point. Making statements with a lot of information missing. Sorry, but to me, this is misleading the consumer. Why?  Because they will read this... HAVE no CLUE... but will read what you wrote, thinking that this or that is good for them. But based on what?  The x factor, X being the unknown. You can't solve for X unless you know what why is. 

Overall, that was half of my so-called dilemma while reading this. As stated, you bring up some good questions. But making statements with no examples, it's too blurry per se. And if you watch my words, I say words like... on the average. My opinion. ... on the average, it will be 4.5 yrs when recouping your costs. NOW... if someone is going to charge higher fees and such, that is different. But I am talking about when comparing your apples to your other apples.   

Lastly,  I am not here to change your mind. You might learn something from it. But I am here to educate the consumer reading this. That more information needs to be supplied. It's like a client telling me that they got a great deal. SO???  Until I see it or until it goes to closing, it's a mute point.

Pretty good overall post, but I still think discount points make sense sometimes.  I know you didn't say they don't but your post definitely is leaning against the points.  Sometimes if a customer is going to be in the home for a while and they only have to pay a fraction of a point to get .125% or .25% better rate it can make sense over time. 

The main thing is to ask the right questions... as you stated at the bottom.