Should I pay points? In today's market, you probably should...

By
Mortgage and Lending with HomeBridge Financial Services (NJ) NMLS 248937

 

First off... I have spent almost 35yrs in this crazy business in a predominantly zero point market place in NJ.  In English: We don't pay points here (not often at least)

If you have not been paying attention we have had a pretty solid 2% increase in rate since the end of 2021, and even more if you go back a year or so.  It is rare that rates move that quickly, we hit 5 much faster than we thought we would and it is looking like 6 will come this year as well.

When interest rates make fast moves like that we experience "Price Compression" where interest rates stack on top of each other. While this does happen often and it can become cheap to buy the next eighth, it usually is short lived.  In today's market you can often grab at least 1/2% improvement in rate for 1 point for a conventional loan. Yesterday we could sneak out 5/8ths better .. for GinnieMaes it was as much as 3/4s better in rate for that point.

So What is a Point? 1 point is 1% of the loan amount, so if you borrow $100,000 it is an additional $1,000 in closing costs. In a normal market that 1 point would probably not save you 1/4% in rate since it is usually between 1/2-3/4 points to get each 1/8th (.125) in rate.  and that rarely makes any sense to do.

Here is the math to show why it has been making sense today:

If you were to borrow $100,000:

At 5.5% your Principal and Interest payment would be  $567.79 and you balance at the end of the first 12 payments would be $98,652

If you were to pay 1 point and get your rate to 5.0% your payment would be $536.82/month  and your balance at the end of 12  payments would be $98,524

While you will only save about $31/month in your payment or $371/yr you also increase your equity position faster at a lower rate for an additional $128 in the first year, so it is almost $500/yr savings so you make up that initial investment in a very short 2yrs time... Effectively a 50% return on investment. 

Time is a factor, it is a break even in 2yrs based on the very realistic scenario above and all that savings can be banked for each payment after.

This is something that can change rapidly and needs to be looked at for each individual loan/client to see who can benefit and when it makes sense.  In the past Month or so it has been an absolute no brainer to pay about 1 point to save for the life of the loan

 

Thanks for Listening!

I’d be happy to put my 30+ years of experience to work for you and your clients

Robert Rauf 
Mortgage Loan Originator NMLS# 248937
http://www.homebridge.com/RobertRauf 
or my blog: http://activerain.com/blogs/rrauf 
Office: (732)908-4868  Cell (732)740-0175 

RRauf@HomeBridge.com 
www.RobertRauf.com
 
 

Since 1987 I have been helping my clients fulfill their dream of home ownership! HomeBridge Financial Services, Formerly REMN, HomeBridge Financial Services is located at 9 Grand Ave, Building 2 Suite A Toms River, NJ 08753. NMLS #6521. New Jersey Licensed Lender and Mortgage Banker #L041053. Visit www.Homebridge.com or www.RobertRauf.com for more information. NJ Mortgages, New Jersey Mortgages, Mortgages in NJ, mortgage in New Jersey, Mortgages in New Jersey, Toms River NJ 08753, Toms River NJ 08755, Brick NJ 08723, Brick NJ 08724 Mortgage in Ocean County NJ, Mortgage in Monmouth County NJ, Jackson NJ 08527, Howell NJ 07731, Lacey 08731 08734, Beachwood 08722 Bayville 08721, 

Comments (4)

Bob "RealMan" Timm
Ward County Notary Services - Minot, ND
Owner of Ward Co Notary Services retired RE Broker

Thanks Robert Rauf . I am very interested in this but it just went over my head so I need to come back and visit it again later.

Apr 07, 2022 11:56 AM
Robert Rauf
HomeBridge Financial Services (NJ) - Toms River, NJ

Bob "RealMan" Timm - effectively the quick move in rates has made it cheap to buy interest rate, normally a temporary phenomime but it feels like this will be the norm until rates settle down

Apr 07, 2022 12:04 PM
Kat Palmiotti
406-270-3667, kat@thehousekat.com, Broker/REALTOR® - Kalispell, MT
Helping your Montana dreams take root

This is why buyers should talk to a mortgage lender up  front - what is the best way to purchase a home? What will it cost up front? What about monthly? etc etc.

Enjoy your day!

Apr 08, 2022 05:20 AM
Robert Rauf
HomeBridge Financial Services (NJ) - Toms River, NJ

Kat Palmiotti , AMEN! For so many reasons, and this is just one of them. Thank you for reading.

 

 

Apr 08, 2022 06:50 AM