Buying Down Your Rate With Points

Is Your Interest Rate Too Good To Be True

Is Your Interest Rate Too Good To Be True
We recently spoke with a buyer on The Real Estate Replay Podcast who thought they were given a great rate because of their near-perfect credit score.   What this buyer didn't know was that the rate was lowered using points, which was never explained to them.  

In case you missed it, here are some key points that Senior Loan Officer, Chelle Prunkel, and host Wendy Gilch discussed during the podcast about points and what you should know before getting a mortgage.
 

What Are Points?

Mortgage points, also known as discount points, are fees that a homebuyer pays to their lender in exchange for a lowered interest rate.  You are essentially just paying some of your interest on the loan upfront.  
 

How Are Points Priced?

You can assume that one mortgage point would cost you 1% of your mortgage and would likely equate to a .125% rate reduction.


Are Points Worth It?

That depends on your loan and how long you plan to live in your home.   For buyers with a fixed-rate mortgage and who plan to live in their home for a long time, it might be a benefit.

If you do not plan to stay in the home for a long time, it might not make sense.    A good lender will walk you through your options, one of which might be no points but a higher downpayment to avoid PMI.  

The best way to decide on if points are worth it is by calculating your break even point.   As an example, it would take you 66 months to break even when buying 1 point on a $100,000 loan.  
 

Does a lender need to disclose that they are having you buy points? 

They do, especially on the application (1003), which is monitored closely for accuracy. The Loan Estimate is not as regulated and often done before a loan officer has all the documentation or even submitted to the lender.  Always compare the information on the application with the loan estimate to find any discrepancies.


Where would a buyer see points being applied in the loan estimate? 

Page 2, Section A of the loan estimate or closing disclosure. On the 1003, L4 line G is where it tells the details of the loan.   Also always ask for the APR in the documents. APR is rate + loan costs expressed in a %. The closer the rate and the APR, the better.

Additional Tips That Can Affect Your Estimate:

When looking at your loan estimate, pay attention to taxes and insurance.   Some lenders may underestimate this section to make your closing costs look better or simply because they aren’t well-versed with your local/state tax structure.  

Always, we repeat, always shop around for title insurance.  The industry is filled with kickbacks, partnerships, and incentives for those in it.  This can be especially true when your agent promotes their “in-house” title company to you.   Just because someone recommends a company to you, doesn’t mean you should just blindly use them.   

Start searching for title companies (and inspectors, for that matter) before you even hit the market to quickly get your loan moving after accepting your offer.