Profile picture for user0190060

Does a mortgage with zero or one point not make sense?

I am asking for quotes on a 15 year fixed (refinancing) and have a broker suggesting I do not want a quote at zero points or one point. Explanation is below.

The other two brokers I've gotten quotes from both quoted at zero and 1 point, so I'm curious if anyone has experience with this, or if the below explanation makes sense. It is a bit confusing to me.

"Since the closing costs are already included in the loan amount, I wouldn't add them back to your total costs. I think a better way to look at would be to adjust the loan amount by the difference in points and then calculate your 180 months. That, of course, assumes that you keep the loan for the full 15 years and you never pay more than the minimum payment.



As for the rate quote, it doesn't really work out to have a zero point quote or a 1 point quote due to the rate/point spreads. For instance, I could quote you zero points but the rate today would be 3.125. I would be doing a disservice to you if I quoted or have you take that rate. The 3.00% with .125% is the way to go. The spread of .125% less up front (.125 cost to zero points) for .125% in rate doesn't make any sense. Your breakeven would be in about a year. The same goes for the one point quote. Today the rate options would be 2.875 with 0.50% or 2.75 with 1.375% (these can change with the market). That spread also does not make a lot of sense. That's .875% for an .125% in rate. We normally like to see about a .50% cost to .125% in rate. That said, the better option would be the 2.875% with ½ point. Even though the numbers may work out for the lower rate option, it would take a long time for the lower rate option to show those savings. If it's too long of a period, the numbers will be subject to change due to various life events.
Does that make sense?"
  • October 26 2012 - Alki
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Answers (5)

There are many different needs and concerns that need to be addressed when looking at a refinance. With how low interest rates are today paying costs to get a lower rate may make more sense than trying to get a no cost loan.

With rates dropping over the past few years many consumers have opted to target zero closing costs loans as they have found themselves refinancing each year to capitalize on the lower rates.

That trend should start to change considering we are now approaching interest rate levels that are as close to the bottom as possible on fixed rate debt.

We offer Zero Cost Loans, but also encourage looking at every option to guarantee you are choosing the right program.
  • November 01 2012
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You need to compare the total cost/savings over time. I have software that does just that. Usually on a 15 yr loan it calculates out better to get a lower rate as the shortened amortization period gives you more bang for the buck. I am guessing you are going from a 30 Yr. to a 15 Yr.? 

If you would like total cost analysis email me with current loan balance, estimated credit score, type of property and estimated value.

Thanks,

Doug
  • October 26 2012
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It depends on how long you keep the loan.  Worse case payback - 2.75% vs 3.125% - is about 6 yrs depending on exact loan amount.  You decide based on your plans.

  • October 26 2012
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Profile picture for Outer Banks N C
I agree with Dave, that is hard to read. I suggest you compare the same rate and points, even if you go with something different. If loan officer A is quoting loan and 2 pts then ask loan officer B to do the same. Otherwise it is hard to compare an apple with half an apple. Ask for quotes with 0 pts, 1, pt and 2 pts. Adding points gives the lender Instant Profit and so they lower the rate by some amount, it's called buying down the rate. Compare equally to see differences. If they won't - say bye-bye.

Tim
  • October 26 2012
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Profile picture for daveskow
that gives me a headache to read / understand !..thanks for sharing

simple process is  compare the  rates/ payments and total closing costs / loan fees

do a standard breakeven analysis to see the length of time it takes to recover the extra 1% loan fee ( 1 point)  via the monthly savings  you would acheive  with the lower rate .....if this breakeven is longer than you plan to keep the home or mortgage ..go with higher rate/ lesser fees

period
  • October 26 2012
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