How do you "buy" a better rate?
Do you plan on keeping your loan for a while? Then it may make sense to "buy" a lower interest rate by paying one or more "points."
Even if youre unsure of how long you plan to keep your mortgage before you move or refinance, paying points now for a lower rate may make sense. For example, do you have a high-paying job now but you think you might change careers in the next few years? We can help you sort it out. Its part of our finding the right loan for your means and goals.
A point -- which equals one percent (1%) of the total loan amount -- is an up-front fee that lowers your monthly interest rate and total interest due over the life of the loan. So, a one point loan will have a lower interest rate than a no point loan. Basically, when you pay points you trade off paying money later in favor of paying money now. You can pay fractions of points, meaning there are a lot of points packages that can make a loans terms more favorable if thats whats right for you.
There are a variety of rate and point combinations available. When you look at different loan programs, dont look just at the rate -- compare the whole package. Federal law requires lenders to publish their loans Annual Percentage Rate, or A.P.R.. The A.P.R. is a tool used to compare different terms, offered rates, and points.
You should be sure whether the loan you are getting into includes points or not. If it does, make sure that it is in your best interest. Will the money you save every month with a lower interest rate recoup the amount you pay in points before you sell or refinance?
Please note, when measuring the option to buy down your interest rate with points, the interest rate does not move in equal incriments as the cost. For example buying down an interest point by .25% or 1/4, will not cost exactly .25%. Also, the lower the interest rate the higher the increments of cost apply.
The loan programs that usually make sense to consider buying down the rate with points would be the 30, 20 or 15 year fixed. By selecting a long term fixed program, you are indicating that you plan on keeping your loan for a long period of time. By buying down the rate, you can save money over the long haul.
There are several things to consider when buying points. One of which is how long your going to stay in your loan. If its the final loan on the house then you may want to buy that interest rate as low as possible.
Another thing to consider is what type of points are you paying for? Are you paying origination points? If so then how many? Paying too many points in origination happens quite often. Many times the broker should instead of charging multiple points in orinination, pay a point or two to buy the rate down. If you trust your mortgage professional then you should definitely discuss the issue of what points are being charged and how are they being used.
Points to buy down interest rates are actually interests paid in advance. It is considered finance charge and therefore tax deductable. Always consult a certified tax accountant before taking such deductions as many various rules apply, such as different deductabilities of purchases and refinances.
Pay very close attention to your loan figures and numbers when you are shopping around for a mortgage loan. One mortgage professional may be quoting you an interest rate that is going to cost you 3 points or 3 percent of the loan amount to obtain, while the other mortgage professional is quoting you a rate that is not paying any points for the mortgage interest rate. Ask, if the rate includes points or not. Look at your GFE, good faith estimate, and see if there is a line item that states discount points with a fee or dollar amount listed there. If the discount points line is completed, then the rate you are obtaining is going to cost you points. Decide what your immediate and future plans are before deciding whether you would like to buy points or not. Sometimes it makes sense and sometimes it doesn't. A good mortgage professional should be able to guide you to make a good decision for your situation.
When deciding whether or not to buy points, also consider all the other costs involved with your new loan. Sometimes buying points may eat up more of your home's equity and you may not feel comfortable with that. If you are refinancing, it is usually a good idea to leave some equity in your home in case of emergencies or the need to sell quickly.