Most people want to obtain the lowest rate possible and although it may make good sense emotionally, it doesn’t always make sense financially. What I am going to write here is whether or not it makes sense financially and exactly how a buy-down works. The best way to determine whether or not buying down the rate would be beneficial is to answer a very simple question: How long do you plan on staying in the home or plan on retaining it?
The reason is that the time to recuperate the costs of the buy down may exceed your living in or retaining the property. The formula to use is the cost of the buy down divided by the amount of savings, monthly. For example: If the cost of reducing the rate is $1000.00 and the monthly savings is $35.00, the break-even point to pay for the buy down is 2.38 years. If you are going to be in or retaining the property for less time than that, buying down the rate makes no sense. You will save more money on the closing cost side of the process instead of the monthly savings side.
There are some key points to keep in mind when considering paying points:
1) The interest rate reduction is not set by any regulator; rather it is set by the lender and the marketplace. You should consult a loan officer at 7th Level Mortgage to discuss the potential benefits and drawbacks when paying points.
2) Your CPA, not the loan officer, is the best person to discuss any tax benefits you may receive when you pay for the buy down when you file your taxes.
3) If you have selected an adjustable-rate mortgage, the buy-down on the rate is typically beneficial only during the fixed-rate period. The loan officer at 7th Level Mortgage can run the numbers for you to make sure that you receive every benefit possible from the loan and that it is both cost and time-effective.
4) The amount you are putting down on the property is also crucial. Putting down less than 20% of the purchase price will put you into paying PMI, so even though the principal and interest payment may be lower, when you add in the PMI you may find that the savings have been reduced or eliminated by the monthly PMI payment. Again, I urge you to consult with the loan officer to discuss this particular scenario.
What is all the rage are programs that tout no costs or no points. While these programs may sound well and good and it may make sense to select those kinds of loans, have the loan officer run the numbers for you so you can compare the rates and fees, as well as whatever reserves, are needed to close on the loan. There is no such thing as a “no fees loan”. You still have to consider that you will still have to pay for title, state fees, and escrows. The only way around those fees is to select a loan that has a very high-interest rate to offset and pay for those costs. No lender is going to process and underwrite a loan and pay for your fees.
This begs the question about points and how much lower will the rate become. When I was originating loans the typical reduction in the rate was 25 bps per point. Because the times have changed and each lender controls those fees, it is no longer that simple. The lower the rate, the higher the fees and vice-versa. Another controlling factor is dictated by the type of loan you are obtaining. The reason for the disproportionate amount of points to obtain lower and lower rates is because borrowers are trying very hard to go well below market rates, quite often so low, the rate they want does not exist and simply would not be cost-effective for them to pay out more than what the savings would be.
What does “no lender fees or commissions” really mean? If you are of the mindset that the lender is working for nothing, that would be a fallacy. There are indeed fees. Although these fees are not expressed as dollar amounts, the fees associated to process and underwrite the loan are included in the rate. What you will NOT find are under-market rates and no fees. No lender would be in business if they offered mortgage rates like that. Please consult with the professionals at 7th Level Mortgage as to what is available and what the features, functions, and benefits are of the programs they offer.
7th Level Mortgage is a leading one-stop mortgage company providing deeply informed, custom-tailored assistance with each mortgage transaction phase. If you are searching for a home loan in New Jersey, Pennsylvania, Delaware, Maryland, New York, or Florida, please contact us today so that we can determine the best Mortgage Lender to place your loan with and get you the best possible rate and program.