The Bibel Team: Paying for Discount Points

Today, I’m here to talk to you about paying points on either a purchase or refinance loan.

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Today we want to talk to you about paying for discount points. We’ve all heard, how many points did you pay? What rate did you get? And here, I want to really hone in on the specifics around what points are, and what they can and cannot do for you when either purchasing or refinancing a mortgage loan. So ultimately what a point is, and when you hear someone talk to you about discount points, ultimately the point is an upfront cost from you, the borrower, to the lender to essentially lower the interest rate. Points are not bad. And again, I’m not here to say points are a bad thing, but unfortunately, in too many contexts when quotes come across our desk, we find that there’s so much added cost to either refinance or purchase on behalf of a consumer that really that upfront cost versus what the interest rate has provided, and in turn the payment difference versus that of a no points rate, your not reaping the benefit.

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So let’s unpack that a little bit. So again, what is a discount point? A discount point is an upfront cost from you, the borrower based on a percentage of the loan to lower the interest rate. So we’ll use an example. Say you’re purchasing, you have a $500,000 loan. You get a couple of different quotes from your lender. They come out with, your no points rate today is three and a quarter percent. So 3.25%. That is the no points rate. You’re not paying the discount for that rate. However, the lender also comes in and says hey, do you want a 2.99 rate? So as consumer, of course we want the lower rate. And ah, you know, it’s, it’s one point. So you, you think about it, you’re like, okay. Yeah. You know, that gives me a monthly payment savings. Perfect. Let’s take it.

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Let’s unpack that a little bit. So three and a quarter on a $500,000 mortgage yields, a payment of $1746 per month. So principal and interest, $1746. That 2.99 now it drops it down to $1684. So $56 savings a month. Perfect. I love it, I want to say 56 bucks a month, I don’t know about you. 56 bucks is 56 bucks. So let’s back that up though. One point. One point though, on a $500,000 mortgage is 1% and this is true for any mortgage, but 1.1% of the loan itself. So $5,000 to get the rate from 3.25 to 2.99. So let’s unpack that even further. So $56 in savings, you paid $5,000 in addition to your normal closing costs. And again, for purchase transaction, that could be anywhere from one and a half to 2%. For a refinance transaction that could be 0.5%, depending upon the fundamentals of the loan, the structure of the loan, but that’s on top of your already existing closing costs.

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So, $5,000 paid for a $56 a month payment reduction. Let’s extrapolate that now over time. So fast forward to recoup that $5,000 for $56 in savings, we need to be in that mortgage for a minimum of seven and a half years. Where you then realize the actual payment savings, essentially is there after seven and a half years. So a couple of things with that. And why bring that up? That is really the baseline for analyzing our points beneficial. Most individuals do not retain in their mortgage for more than six years. National average, typically either refinance sell, pay off whatever that happens to release whatever event triggers the releasing of that mortgage typically happens within a six year period. So here in this particular scenario, knowing that, seven and a half years, well, if you release the loan or pay off the mortgage, refi, whatever that event that triggers the removal of that mortgage at year six, well, it took seven and a half years to recoup that $5,000 through some payment savings. You essentially took that $5,000 and threw it in the trash.

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So again, why we want to talk through this and really have an understanding as consumers is, we are trained that the lowest rates is the best option. Not in all cases though. Lowest rate doesn’t necessarily mean lowest cost. So really when we evaluate these scenarios for our clients, we want to approach the end product in that is this the lowest cost for you? Does this provide the most value in today’s context, but more importantly, over the life of the loan? And that’s really what drives home the end decision making process. So, as I said, earlier, points are not all bad. There are scenarios where paying a discount does provide benefit. So why I would say that is, let’s say it is a matter of fact, this is the home you are going to live in for the remainder of your life. And whatever reason triggers that say, it’s an inheritance from a family member, you took it over from, you know, your parents or your siblings, whatever trigger event that is. But, you know, for you know, unparalleled conviction that this is forever home.

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If that is the case, then we really want to map out, okay, well, after year seven and a half, what is the actual savings triggered by the lower rate? Is there an actual recapture of the upfront investment of $5,000 over the life of the loan? So whether it be through interest payment, principal, allocation, so how much more money you’re paying towards principal, so on and so forth. So again, it’s at face value. Yes, lower payment? Oh, we all want the lower payment. But really getting true understanding of what that upfront cost is and what benefit it provides to you. We would love to dig into this deeper with you and for you, please reach out to myself and my team today. Thank you.

 

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