The Myths about ZERO point mortgages instead of paying points

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Mortgage and Lending with Social Media - Infinity Home Mortgage Company, Inc

 

mortgage questions

 

When shopping for a mortgage, one needs to know and understand their specific goals, and this should be done even before you start to look at a home or speak to a loan officer.  The reason being is because there are several ways of looking atzero points, in which some advertise with no points or no costs, and if you should pay points for your interest rate.

The first step is to have a list of  your short term and long term goals.  Not only should you know your goals, but your loan officer should be asking about your goals.

Below is what I consider to be the most important questions that should be asked in the first 5 to 10 minutes.

  • What mortgage payment would you feel comfortable with. (not the max amount that you could be approved for)
  • What are your goals, short term and long term.
  • And I ask questions about their assets.  Ie. : checking account, 401-k, or if they could get a gift.

Having answers to these questions, I can formulate some game plans on how to utilize the borrower's assets to best help them out now and in the future. Keeping in mind that things do change later on in life, that we don't have crystal balls. I also make sure the borrower is aware of this.

I do want to point out one thing. There are some borrowers that just know what they want. Some will call up and say,  "I want Zero points" and or "those no cost loans". Just because the borrower says that they want this type of loan, doesn't mean that it fits their needs.  I love to explain, to educate, and to show in comparisons.

 

Here is an example of paying points or not paying points, aka no points or zero points.

comparing no points with points for mortgages

In this example, there are $930 in standard lender closing costs.  You would be paying these out of pocket with the lower interest rate of 4.75%, so I included these fees in the total points.  With the higher rate, I am including the fees in the interest rate. This means that you are paying the lender fees in the rate and not extra monies at the closing table.  I could show you this example with the fees outside the rate, but I wanted to make a point on how to get the best bang for your buck.

As you can see, comparing basic apples to apples, it would take you 7.76 years to recoup the points just from the monthly savings. What some loan officers fail to show are the total savings from different categories. You need to look at :

  • Your monthly savings
  • Difference in principal remaining
  • Tax write off on the points paid at closing
  • Tax write off on the interest

.

Here are why goals are important. In my example below, let's say your goal is to live in the house for 5 years.  I am also using a tax bracket of 28 percent for income tax purposes.

exploring the different variables when it comes to comparing points and no points

Your real break even point after all the variables is 5 years.

Sometimes these scenarios are tough to show, because the interest rates have been ever changing. And because the spread between each 1/8 th of a percent is normally 3/8 th's of a point, but the interest rates have not been reflecting that in the last few weeks to a month. For example purposes, I am not going to get into the details. The main focus point should be that your loan officer should compare several scenarios on your behalf, making sure that you are using your money wisely.

 

Conclusion : Over the years, I have heard many rumors that paying points to lower your interest rate costs you more money, which is why some lenders talk you into a higher rate. Some times they can make more money on the back end.  If you have the money or can get a gift, know your goals, and have a very good idea on how long you will be in the house... as you can see, it pays off down the road.

 

Disclaimer - Everything mentioned above is of my opinion and knowledge with 18 + years experience in mortgage lending. Please consult your CPA or Tax Accountant.

Colleen Craig wrote this excellent post on no cost mortgages.  Myths on No Cost Loans - The bottom line is that every lender and or bank will get it from you one way or another. Hence why I prefer having the borrower pay points and no lender costs.

 

UPDATE : @ 6:47 pm - You need to read the whole post and the charts. On the surface, it looks like you break even in 7.76 years, but after reviewing all of the categories to look at, your actual break even point is 5 years... and that I am including the lender costs in the total scenario. I will say this.. if you went back about 6 months and longer, the breakeven point usually comes out to 3.5 to 4 years. Why?  Because some coupons for lower rates would be cheaper. But it's to expensive to drop to 4.625% right now. FYI..  

 

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Copyright © 2011 by Jeff Belonger of Infinity Home Mortgage Company, Inc

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Re-Blogged 3 times:

Re-Blogged By Re-Blogged At
  1. 1~Judi Barrett 12/17/2010 10:09 AM
  2. Bob & Leilani Souza 12/18/2010 06:02 PM
  3. Gerry Suarez Jr. 12/31/2010 07:16 AM
Topic:
Lending / Financial
Location:
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Groups:
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Mortgages
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The FHA Mortgage Group
Tags:
interest rates
paying points
no cost loans
no points
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no point loans

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Ambassador
920,701
Missy Caulk
Missy Caulk TEAM - Ann Arbor, MI
Savvy Realtor - Ann Arbor Real Estate

Very true, Jeff.

Most borrowers dont' understand the long term effects. It all depends like you said on your long term goals and how long you think you will be there.

 

Dec 17, 2010 12:43 PM #12
Rainmaker
662,099
Patricia Aulson
BERKSHIRE HATHAWAY HOME SERVICES Verani Realty NH Real Estate - Exeter, NH
Realtor - Portsmouth NH Homes-Hampton NH Homes

Thanks for the informative post today.  

GOod information. I've bookmarked this post for the future.

 

Patricia/Seacoast NH & ME

Dec 17, 2010 01:08 PM #13
Rainmaker
421,409
Michelle Francis
Tim Francis Realty LLC - Atlanta, GA
Realtor, Buckhead Atlanta Homes for Sale & Lease

Jeff, 

The devil is in the details.  It's not that tough to look at the details, however, so many folks seem sucked in by the glamor of "no points".   I'd rather understand both options and decide.  

Having said that, since more is required to put down today in terms of down payment, it could be it makes getting the home more feasible and that is good too.  As long as you know what works for you and the trade-offs. 

All the best, Michelle

Dec 17, 2010 01:28 PM #14
Rainmaker
394,961
Elizabeth Cooper-Golden
Huntsville Alabama Real Estate, (@ Homes Realty Group) - Huntsville, AL
Huntsville AL MLS

Jeff, You are the master of delivering useful, must have information for consumers.  Love the break down here!

Dec 17, 2010 01:51 PM #15
Ambassador
750,348
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

INGRID... . Since day one, I have always loved showing these kinds of breakdowns... and found that my competition hardly did this... yet they usually got the business. I guess they used those great sales terms & phrases as, I am the best, here are the cheapest rates.. etc, etc.. yet many lied. Just my opinion... and thanks for the kind words and for the compliment.

MISSY... . no they don't... and matters are made worse when the loan officer doesn't ask about the borrower's goals and or doesn't go over these kinds of scenarios. ps.. love your new profile pic.. 

PATRICIA.... . my pleasure and thanks for the compliment.

 

MICHELLE... . or the devil is in the topic that is not talked about. Maybe not tough to look at the details, but tough for many that don't take the time to explain all of this... either some are lazy, some don't know, or some just don't care.  

As far as needing more to put down.. not necessarily true... maybe on conventional deals because of credit scores and or because of MI... but you still have FHA 3.5% down and VA & USDA 0% down. But I do understand what you are trying to say... thanks for your input.

 

COOP... . <blushing> seriously, thanks for the kind words and for the compliment...

 

Dec 17, 2010 02:31 PM #16
Ambassador
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Praful Thakkar
LAER Realty Partners - Andover, MA
Andover, MA: Andover Luxury Homes For Sale

Great feature post (will use some numbers from this for my clients)

And afterall, it's all about numbers and math...

Dec 17, 2010 02:42 PM #17
Rainmaker
1,027,150
Susan Haughton
Long and Foster REALTORS (703) 470-4545 - Alexandria, VA
Susan & Mindy Team...Honesty. Integrity. Results.

EXCELLENT post and so very helpful in providing the talking points agents need in order to even explain to the client why they need a loan officer who will do this kind of analysis for their particular situation.  Nobody does this better than you do.  

Dec 17, 2010 02:49 PM #18
Rainmaker
564,419
Chris Olsen
Olsen Ziegler Realty - Cleveland, OH
Broker Owner Cleveland Ohio Real Estate

HI Jeff -- My takeaway from this -- a REALTOR should partner with a loan officer as knowledgeable as you for their buyers. :)

Dec 17, 2010 03:52 PM #19
Rainer
387,559
Doug Anderson
Tucker Associates Real Estate Services - Danville, CA
Bay Area Real Estate Views

Well done Jeff. Since a home is the single largest asset for most folks should the mortgage on it not be a major part of financial planning? There is no "one size fits all" mortgage.

Dec 17, 2010 04:13 PM #20
Rainmaker
1,074,796
Bill Gassett
RE/MAX Executive Realty - Hopkinton, MA
Metrowest Massachusetts Real Estate

Jeff this is an excellent job of showing how points effect a mortgage and whether it makes sense to use that type of program or not. I have written an article about when to pay point on a mortgage loan myself over at my Wordpress blog.

Dec 18, 2010 12:45 AM #21
Rainmaker
256,510
Susan Jackson
America's Network Realty Group, Inc - Sandy Springs, GA

Great Post.  Thanks for the info. I have had clients come back to me, asking for explanations because they just did not get the info they were looking for from their loan officer. 

Dec 18, 2010 04:33 AM #22
Rainmaker
837,591
Mike Bjork
Pinnacle Home Loan - Redondo Beach, CA

Hi Jeff, great post.  It's always important to provide the client with the various options, so they can make an educated decision.  They may not have seen all angles of the process, which they may have heard something good to their ear, but in reality, it may not be applicable to their situation.  Could you touch on your first illustration, which you have .75 Points as title, but reflect 2.125 Points for cost?

Dec 18, 2010 04:53 AM #23
Ambassador
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

PRAFUL.... yes, numbers and figures don't lie, unless the person inputing them manipulates them or screws them up.  And thanks for the compliment.

SUSAN... . I truly think this doesn't happen much with many loan officers when speaking to borrowers.  Why, because it takes more time. Why not just give the borrower what they ask for. Just my opinion.. and thank you very much for the kind words and for the compliments.

CHRIS..... I would think many would agree.. my problem with this, I have talked to some borrowers who went with the preferred realtors choice, swearing on that loan officer, and so much information is left out and or talked about. Sad and scary, but so true at times.

DOUG... . yes, one of the biggest investments ever in ones lifetime... and bingo, no one size fits all.. I kind of wrote about this once before.. "I want that deal my friend got..."

BILL.... .  thanks for the compliment and I will check out your post later.. thanks

SUSAN JACKSON... . don't get me started on not getting information from their loan officer. Sorry, but I would bet 80% or so don't think about this or care to, because it takes time. Esp[ecially those loan officers that work for large banks in call centers, and deal with 15 to 20 calls and or clients a day..  and thanks for the compliment..

MIKE.... first off, thanks for the compliment..  and yes, many think they have heard of a good option and stick to it, and then the loan officer doesn't ask and or debate... they just give them what they want.  In regards to the difference in points.. thanks for bringing this up. I was playing with different figures and had .75 as part of a difference and used that by accident.  But it didn't change my total numbers. The difference between the 1.75 pts for that rate and the 2.125 total pts is the lender fees. I believe in charging all pts and no fees, so the borrower can write them off.  In any case, again, thanks for bringing this up.. I changed it now.. glad someone actually reads the charts and tries to understand them and not assume they are correct just because I said so. ;o)

 

Dec 18, 2010 06:50 AM #24
Rainer
135,845
Linda Humphrey
Humphrey Home Connections Realty, Reno, Nevada - Reno, NV
CRS, Broker/Owner HHC Realty

This is really interesting, because once upon a time, I WAS that person. Wouldn't even consider paying points because I believed that it was prepaid interest that would take me more or less the life of the loan to break even on. And who owns a house for thirty years? How many lenders would you guess sat down and went through the numbers with me? I think you know the answer to that! Nice job.

Dec 18, 2010 01:48 PM #25
Rainmaker
662,099
Patricia Aulson
BERKSHIRE HATHAWAY HOME SERVICES Verani Realty NH Real Estate - Exeter, NH
Realtor - Portsmouth NH Homes-Hampton NH Homes

Thank you for getting this post out to us today.   I've bookmarked this for the future.

Happy Holidays!

 

Patricia/Seacoast Nh & ME

Dec 18, 2010 01:58 PM #26
Rainmaker
427,439
Leslie Ebersole
Swanepoel T3 Group - Saint Charles, IL
I help brokers build businesses they love.

I get a little foamy in the mouth and hyperventilate when I try to explain to some buyers "money isn't free". Just like thinking about the total cost of ownership, people need to think about the total cost of of a loan. Twitch, twitch.....deep breath.

Dec 18, 2010 03:16 PM #27
Rainmaker
1,070,800
Bob & Leilani Souza
Souza Realty 916.408.5500 - Roseville, CA
Greater Sacramento Area Homes, Land & Investments

Jeff, thank you for the very informative blog post that I think all borrowers should read...you made it so easy to understand that I couldn't resist re-blogging it! :)

Leilani

Dec 18, 2010 06:05 PM #28
Rainmaker
597,093
Jim Hale
ACTIONAGENTS.NET - Eugene, OR
Eugene Oregon's Best Home Search Website

Buying a loan may not have as many parameters/attributes to consider as in choosing a home, but (just like in a house pick) one should always look at the long term, lifetime-of-your-ownership costs.

Dec 18, 2010 06:24 PM #29
Rainer
245,924
Shannon Coe
Keller Williams - Rocklin, CA
916-597-3818, Lincoln, Rocklin, Loomis, Roseville

very good, I enjoy all the infor you give.

Shannon Coe Realtor #01489731

WR Properties Brentwood Ca

http://www.ShannonCoe.com

Dec 19, 2010 12:45 AM #30
Rainmaker
166,573
Tina Gleisner
Home Tips for Women - Portsmouth, NH
Home Tips for Women

Great article showing you have to work the numbers and why the obvious isn't always the best. Thanks for taking the time to share this information.

Dec 19, 2010 02:06 AM #31
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