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There is little doubt that the lending business has changed dramatically in just a short period of time.
As the outlook on rates is rather uncertain it is understandable that lenders want to lock-in borrowers.
While a reduced rate made possible with points MAY be the right thing to do, paying those points means that it is going to be very difficult to refinance for quite a long time.
It may very well be that rates will not be heading down, and lenders merely want to the "upfront" points to but some immediate cash into their hurting mortgage units.
If (and this a very big if...) the lenders' "brain trusts" * see the possibility of needing to reduce rates to VERY low levels to jump start home sales they are NOT going to want to be hit by a wave of refinancers trading out loans that pay them great than 6% of something that may be lower...
I generally do not try to predict loans, and I am really not that good about even guessing the direction, so don't take my comments with too much concern. Just realize that lenders dislike uncertainty and will act in what ever way they can to limit that uncertainty...
* the brain trusts were the ones that largely BLEW us into the whole mess we are in now, so even IF they are advising their units to use points to reduce their risk of the BEST borrowers locking themselves into rates that may not be all that great, their skills are HIGHLY suspect.
Buydown strategies are a financial planning method
Hi Chet,
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As the outlook on rates is rather uncertain it is understandable that lenders want to lock-in borrowers.
Lenders price & hedge their loans so that they lock in their rate of margin (profit) when the loan itself is locked. After a loan is originated, the further shifting of the rate markets neither helps nor hurts the lenders.
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While a reduced rate made possible with points MAY be the right thing to do, paying those points means that it is going to be very difficult to refinance for quite a long time.
Paying points to secure a lower interest rate is merely pre-paying an amount of interest (typically a 3-5 year amount) in return for a locked in permanently lower rate... so your breakeven point on properly strctured buydown points is normally 3-5 years.
Refinancing isn't any easier nor more difficult if you've used a buydown strategy... but if rates dropped so low as for it to make sense... OR if you move (and thus sell) prior to yoru breakeven point... OR if you determine it makes financial sense to seperate your equity from your illiquid real estate for safety or growth prior to the breakeven point..........
... THEN your buydown interest expenses are simply "sunk costs" at that point.
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It may very well be that rates will not be heading down, and lenders merely want to the "upfront" points to but some immediate cash into their hurting mortgage units.
The upfront-paid buydown points do not go into a lender's profits... the lender themselves have to actually use those funds to go to the mortgage-backed securities futures markets to buy the borrower's interest rate down permamently to the level the borrower is requesting.
Quote:
If (and this a very big if...) the lenders' "brain trusts" * see the possibility of needing to reduce rates to VERY low levels to jump start home sales they are NOT going to want to be hit by a wave of refinancers trading out loans that pay them great than 6% of something that may be lower...
Lenders have no control over the bond markets that determine mortgage interest rates.
Quote:
I generally do not try to predict loans, and I am really not that good about even guessing the direction, so don't take my comments with too much concern. Just realize that lenders dislike uncertainty and will act in what ever way they can to limit that uncertainty...
THIS MUCH IS TRUE... and the way lenders avoid uncertainty is in the freezing-in of the best competitive profit margin they can get at the point when the loan is locked (and then subsequently funded.)
Quote:
* the brain trusts were the ones that largely BLEW us into the whole mess we are in now, so even IF they are advising their units to use points to reduce their risk of the BEST borrowers locking themselves into rates that may not be all that great, their skills are HIGHLY suspect.
Interest rate buydown points neither reduce lender's risks, nor increase their profitability.
I like to look at it a different way... a $200k home with 20% down payment on a 30 year term... say you paid ONE point to lower your interest rate from 5.45 to 5.25... With interest and everything you would have paid $185,900 in interest alone at 5.45 interest rate... at 5.25 interest rate, the interest would be 177,800... that means a savings of 8k... however you INVESTED 1% ($1,800 at the beginning with the point)... now that savings would be cut to a little over 6k right? Wrong! Why? Say you invested 1.8k into a 3% interest bearing account... that would be $4,300 at the end of the 30 years... so in essence, you only saved a little over $2,300... now if you made 5% interest, you would have actually LOST money (i.e. paid more money on the mortgage than you would without paying any points)... Now here is the kicker... to make sure a "point" or two is worth paying, you HAVE to crunch the numbers and compare not only the interest rates but also if you were to invested the 1.8k to see if its worth it... sometimes it is, but sometimes it isn't... unfortunately most homeowners are too lazy to do the simple math...
I like to look at it a different way... a $200k home with 20% down payment on a 30 year term... say you paid ONE point to lower your interest rate from 5.45 to 5.25... With interest and everything you would have paid $185,900 in interest alone at 5.45 interest rate... at 5.25 interest rate, the interest would be 177,800... that means a savings of 8k... however you INVESTED 1% ($1,800 at the beginning with the point)... now that savings would be cut to a little over 6k right? Wrong! Why? Say you invested 1.8k into a 3% interest bearing account... that would be $4,300 at the end of the 30 years... so in essence, you only saved a little over $2,300... now if you made 5% interest, you would have actually LOST money (i.e. paid more money on the mortgage than you would without paying any points)... Now here is the kicker... to make sure a "point" or two is worth paying, you HAVE to crunch the numbers and compare not only the interest rates but also if you were to invested the 1.8k to see if its worth it... sometimes it is, but sometimes it isn't... unfortunately most homeowners are too lazy to do the simple math...
Don't forget about the capital gains tax on that invested money. I found a really good online calculator to help crunch those numbers.
But you also have to remember opportunity cost of the money that you're using to pay points. We're closing on our house next month. We are thinking about buying a point but that means we can't use that money to add to our son's college fund (he's 2 now so there are many years for the market to come back). With the market so low, we might be missing a golden opportunity to buy really low. Who knows what we'll do...
evilnewbie, I tried to follow your thread the best I could but is there a typo in there somewhere? - 20% down on a $200k home? that's a loan of $160k, right? coz 1% is not 1800...
evilnewbie, I tried to follow your thread the best I could but is there a typo in there somewhere? - 20% down on a $200k home? that's a loan of $160k, right? coz 1% is not 1800...
One very important piece you left out was the tax deductibilty of the point paid when you bought the house. So, if you pay $1600 point, and you are in a 25% tax bracket, you actually paid $1200. Also rates move in .125% increments, so you cant lower a rate from 5.45 to 5.25 since 5.45 doesnt exist. Generally, the 1st point paid buys the rate down by .25% to .375%
Quote:
Originally Posted by evilnewbie
I like to look at it a different way... a $200k home with 20% down payment on a 30 year term... say you paid ONE point to lower your interest rate from 5.45 to 5.25... With interest and everything you would have paid $185,900 in interest alone at 5.45 interest rate... at 5.25 interest rate, the interest would be 177,800... that means a savings of 8k... however you INVESTED 1% ($1,800 at the beginning with the point)... now that savings would be cut to a little over 6k right? Wrong! Why? Say you invested 1.8k into a 3% interest bearing account... that would be $4,300 at the end of the 30 years... so in essence, you only saved a little over $2,300... now if you made 5% interest, you would have actually LOST money (i.e. paid more money on the mortgage than you would without paying any points)... Now here is the kicker... to make sure a "point" or two is worth paying, you HAVE to crunch the numbers and compare not only the interest rates but also if you were to invested the 1.8k to see if its worth it... sometimes it is, but sometimes it isn't... unfortunately most homeowners are too lazy to do the simple math...
Last edited by VictorBurek; 12-15-2008 at 08:17 PM..
Reason: mistype
I also wanted to point out that it has been my opinion that most loan officers do not want to take the time to educate their clients as to the benefits of paying a point to buy a lower interest rate. It is easier to sell a client on lower fees , but part of being a professional in this industry is to educate your clients so they can make an informed decision.
I was going back and forth between 5.0 with 1 pt and 5.25 with 0 points. The break even for the 5.25 was 2 years, 3 years for 5.0 with 1 pt. This is putting the point back into the mortgage balance. After 8 years (just a number, its actually sooner), the 5.0 with 1 point has "beat" the 5.25 with 0 points. For us it is about how long you are going to be in the home...
You got it Joe. Dont let anyone try to tell you that someone is pushing points cause it is better for them. Look at the total costs, find a break even point and if you will be at that home for a longer period it makes sense.
Generally speaking, if someone is going to be in their home for at least 3 years, it makes sense to pay costs and a point to buy a better interest rate.
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Buydown strategies are a financial planning method
