April 29th, 2021 10:39 AM by Jackie A. Graves
When beginning to get interest rate quotes from mortgage lenders, it can get pretty confusing pretty quickly. Consumers can sometimes think lenders have just one interest rate for each loan program. After all, rate advertisements show just one rate along with the calculated APR. The fact is lenders offer an array of interest rate choices for the exact same loan program.
A 30-year fixed rate loan program can offer several rate choices in 0.125% increments, not just one. The lender does not really care one way or the other which rate you choose, the ultimate net to the lender is pretty much the same. The difference is whether or not you choose to ‘buy down’ the rate by paying discount points, or simply ‘points.’
A point is actually a form of prepaid interest. Paying the lender interest up front in the form of points results in a lower rate on the loan. But it is up to you whether or not to pay points. Again, the lender does not care which rate you choose. Some rates require discount point payment while other rates do not. A so-called ‘no point’ loan means just that. The rate does not require any points to be paid.
If you want a lower rate, you can pay points. Your loan officer will provide you with various rate/point combinations. At some stage, all of these numbers can get a bit confusing. That said, should you consider paying points to lower your rate? That is up to you of course, but personally I wouldn’t recommend it. However, it is relatively easy to determine whether or not paying points makes financial sense.
Let us look at a scenario. Let us say someone is borrowing $300,000 and wants a 30-year fixed rate loan. In the process of getting rate quotes, a lender quotes a 30-year fixed rate of 3.00% with no points and 2.75% with one point. The 3.00% results in a monthly payment of $1,264 while the 2.75% rate gives a payment of $1,224, or a difference of $40 per month. It is probably evident at this stage that the point will not really be a good investment.
If you run the numbers, you will find that paying $3,000 to save $40 might not make much sense in this scenario. To get that $3,000 investment back, it would take 75 months, or a little more than six years, to get a return on that money.
When you speak to a loan officer to get rate quotes, have the loan officer calculate the ‘return’ of paying discount points. If the return is say, two years and you intend to own the property longer than two years, it might very well make sense. But if would take much longer than that for the lower rate to provide a direct benefit, you might want to reconsider paying any points at all. Again, the lender does not care and neither does your loan officer. You are in the driver’s seat here. Just be careful not to drown in a sea of numbers.
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