Borrowers: Should You Pay Discount Points to Buy Down the Mortgage Interest Rate?

Borrowers: Should You Pay Discount Points to Buy Down the Mortgage Interest Rate?


Well hi there, I’m Michael Hausam of the
Hausam Group at Vista Pacific Realty. So today I’d like to help you answer a very
popular question and that is, “Should I pay discount points to buy down a
mortgage interest rate?” It’s a question that comes up on almost every single
refinance and definitely every single purchase transaction; but first we need
to do a little bit of education and background on interest rates and costs
and lenders; so I’m going to show you a chart here in a second that was the
screenshot from this morning’s interest rates and it’s gonna show about
one-third of the lenders that I work with.
This shows the menu of lenders this morning who were offering an interest
rate of four and a half percent on a 30-year loan at the Fannie Mae / Freddie
Mac maximum loan amount of six hundred and seventy nine thousand six fifty. It
also shows what each lender is charging for that particular rate. We will pick
the lender at the top, Freedom Mortgage, who this morning had the best price for
this rate. Now another thing to know about interest
rates is that every single lender changes their rates every single day, so
this morning Freedom Mortgage was at the top, at four and a half percent, but
tomorrow it could be any number of the seventy five lenders we work with. And
also just because freedom was the best price at four and a half percent, doesn’t
mean that they were the best price at four and a quarter percent or a four and
three-quarters percent. It could have been another lender altogether. This
chart shows the pricing for all of the rates offered by freedom mortgage this
morning, ranging from four percent up to five and three-quarters percent. For the
sake of our discussion, we’re gonna pick the ones at four and a quarter, four and
a half, and four and three quarters. Now another term that I needed to define is
discount points. You’ll hear that: discount fee, discount cost, discount
points; it’s all the same thing and it’s basically the money the price
that the lender charges for a specific interest rate, usually expressed as a
percentage of the loan amount or a flat dollar amount. Now it also can be
expressed as a negative number, a negative discount point, or a lender
credit. So the way that would work is that at a really low interest rate you’d
have to pay something – a discount point or a discount fee – and then at a higher
interest rate the lender will actually give you money back, that you can usually
use as a credit for closing costs. So the question is what is the better way to go?
And the answer is: “It depends.” This chart shows the interest rate, the
discount costs, the dollar costs, and the monthly payment on a six hundred and
seventy nine thousand six hundred and fifty dollar loan at four and a quarter
percent. The discount fee is one point two to four percent of a loan amount,
or eighty three hundred and eighteen dollars and ninety two cents, and the
monthly payment at four and a quarter is three thousand three hundred and forty
three dollars. At four-and-a-half there’s a very slight
credit of 0.116 percent , which is seven hundred eighty eight dollars and
thirty nine cents ,the monthly payment at four and a half percent is a hundred
dollars higher at $3,343. At four and three-quarters percent ,it’s a larger
credit of 1.174 percent of the loan amount which amounts to a lender credit
of seventy nine hundred and seventy nine dollars and nine cents and for that the
payment is a hundred and two dollars a month higher. Now for this discussion, I’m
using the maximum Fannie Mae Freddie Mac loan amount in Orange County of six
hundred and seventy nine thousand six hundred and fifty dollars, but the
mathematics and the percentages and the payments work out exactly the same,
comparing whether it’s a hundred and seventy nine thousand dollar mortgage, a
million seventy nine thousand dollar mortgage, or a five million seventy nine
thousand dollar mortgage; So keep that in mind, that whatever comparison and
discussion we have, it’s the same for any loan amount that you get. At four and a
quarter percent versus four and a half percent, it’s a hundred dollar difference
in payment, but at four and a quarter percent you have a little over eighty
three hundred dollars in costs whereas at four and a half you get a lender
credit of seven hundred and eighty-eight dollars; a total of ninety one hundred
dollars difference in cost. Well, if you take that ninety one hundred dollars and
divide it by the hundred dollar-a-month difference in payment, it takes ninety
one months to get that payback. In other words if you paid ninety one hundred
dollars out of your pocket to drop the interest rate from four and a half down
to four and a quarter, $9,100, that hundred dollars a month in
monthly payment that you would save would take you ninety one months before
you broke even. Meaning it’s not until you’re 90 second month that you would
actually start to make money. Now let’s compare the payback period
for four and a half versus four and three quarters percent, which was a
hundred and two dollar difference in monthly payment. At four and a half,
there’s a 788 dollar and change credit; at four in three quarters
it’s just over seventy nine hundred and seventy nine dollars. Again if you take
the difference, which is seventy one hundred ninety dollars and divide that
by a hundred and two dollars and monthly payment savings, it’s a 70 and a half
month payback. In other words, if you took the seventy one hundred dollars from the
lender and went from four and a half up to four and three quarters, you’d be
saving money at a rate of a hundred and two dollars a month for 70 and a half
months. That’s almost seven years of savings. It’s not until after that that
the monthly payment wipes out all the gains that you had up front. So what’s
the better way to go? Again, it depends. Obviously, on a straight dollar for
dollar basis, it’s better to take the higher interest rate and the lender
credit than to pay all those costs upfront for the lower monthly payment. I
mean you’ve got seven eight or nine years out in the future before the impact
of that decision is made, but some people are so focused on having the lowest
monthly payment that they’d prefer in their mind to think money savings on a
monthly basis as opposed to saving all the money up front.
Another option is, and this happens occasionally, if somebody’s getting
relocated from another part of the country and their company is paying
their closing costs; well, if it’s not your dollars that are paying for the
lower interest rate ,take the lower interest rate! And then lastly, there’s a
creative way that you can play with this, as well, and that is you can include it
in the purchase price. If you pay a certain number of dollars more for the
house but have the seller credit you back
for closing costs, then you apply those closing costs to the monthly payment,
that actually could potentially save you more money. In other words, just using
these numbers for example, if you paid 9 grand more for the house and you have a
hundred and two dollars a month less in monthly payment, that’s a far better way
to go. I can help you figure out, in your specific situation, what’s the best way
to go. So if you need to buy a house, sell a house, or finance a house, please get in
touch with me. It would be my privilege to help you. You can call me at nine four
nine four one three two three seven one; you can email me Michael at HausamGroup.com; or if you click – should be a little button right above my head – here…
if you click that, that will take you to my website and there’s ways on there
that you can get ahold of me as well. Thanks so much for listening. Have a
great afternoon!

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