January 1st, 2018 7:34 AM by Jackie A. Graves, President
There’s a direct relationship between mortgage rates and fees,
meaning that you can elect to pay higher fees for a lower rate. This is known
as “buying your rate down” or “paying points.”
review these terms, and discuss how to understand loan quotes, and how to know
when buying a rate down actually benefits you.
mortgage rate quote is a combination of rates and fees. Initial quotes often
come in online forms or emails, then the quote is eventually formalized into a federally-required form called a Loan Estimate once
you’ve completed a full loan application.
loan quote will show you what kind of loan you’re getting (such as a fixed or
ARM loan), what your rate is, and how much you’re paying for that rate.
loan quote always must show annual percentage rate (APR), which is a
calculation that helps you determine how much you’re paying for the rate. As a
rule of thumb, if APR is about .125 percent higher than the quoted rate, the
fees will be customary and normal. If APR is more than .125 percent higher than
the quoted rate, the fees are higher than normal, and may include a rate buy
down. In either case, you must ask to review a line-item breakdown of fees.
your rate down” or “paying points” both mean that you’re paying an extra fee to
get a lower rate. This fee can be called origination fee or points on your loan
quote. It’s based on a percentage of your loan amount, and it’s in addition to
more traditional fees like appraisal, credit report, underwriting, and title
insurance (more below on locating these fees in quotes).
might get a quote that includes two options: one for points, and one for no
points. For example, if you were getting a 30-year fixed loan of $300,000, the
quote with no points might show the rate as 4.25 percent, and the quote with 1
percent in points might show the rate as 4 percent.
this example, the points would be $3,000 because they’re equivalent to 1
percent of the loan amount. This $3,000 is in addition to all other traditional
$3,000 lowers your rate by .25 percent, which lowers your payment $44 per
month, and lowers your interest cost $62.50 per month.
determine whether buying down your rate (aka paying points) makes sense, you
have to calculate how long it takes your monthly interest cost savings to repay
the cost of the points.
this example, $3,000 in points gives you monthly interest cost savings of
$62.50. So we divide $3,000 by $62.50, which shows us that it takes 48 months —
or four years — for the interest cost savings to repay the points.
it takes four years to break even on paying points for a 30-year fixed loan,
this provides many years after the breakeven period to benefit from the lower
if you had a four-year breakeven period on a 5-year ARM loan, then you’d only
have one year of benefit from the lower rate before the loan adjusted.
breakeven calculation is the key to determining whether buying down your rate
paying 1 percent of the loan amount in points will lower your rate by .25
percent, but this isn’t always the case. Ask your lender to provide options for
paying points (or buying your rate down) so you have a few options to analyze
for favorable breakeven timelines.
law defines a full loan application as having provided the following six items:
you’ve submitted your full loan application, your lender has three days to give you a Loan Estimate document.
Page 2 of the Loan Estimate shows points
in the top left section called Loan Costs. This will show the exact percentage
of the loan amount for any points being quoted. It also shows the dollar amount
of the points.
are the figures you’d use to make your breakeven comparison calculations.
2 of the Loan Estimate also shows all the other line-item fees you’ll pay for
the loan, so you have a full picture of your transaction before you go forward.
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