buying points?

really depends  on 2 things ...time you plan to stay in property ....and cash availability ...in many cases  the breakeven point  between paying 0 points and 1  point is 3-5 years......

This is an interesting point.

It really depends. We worked it out with a guy whom wanted a honking huge 5 point discount .

We calculated on his 100k loan he would save 13k over 15 years . He wanted a 15 fixed.

We then deducted the 5k (original cash to buy it down) from his 13k profit and indicated he made his 5k back and 8k more over the 15 years.

We had to realize he could probably make more on his 5k investing it over 15 years than just chunking it down to buydown points.

If you plan to stay in the property 30 years and never sell or refinance, then the case for buydown points is fine . I dont know if its any better than just investing the cash .

But if you buydown and then sell or refi within 5 years , you will probably have lost money.

my .02

To determine for yourself the relative value of buying down your rate with additional loan fees:

1) Compare the difference in principal and interest payment between one rate and the other.

2) Divide your additional cost to get that rate, by the monthly payment difference which gives you the # of months to recover your additional paid cost. This is your breakeven point (not counting the lost revenue if this additional cost was invested, or "lost opportunity cost".)

3) Once you pass the breakeven point, each month that payment difference is additional savings to you. Multiply that difference gives you the $$$ amount saved per year, as long as you still have that loan.

4) If you sell or refinance before the breakeven point, unless you really needed that lower payment, (fixed income etc.) you would have been better off with the higher rate and less cost.

Generally I have found a very good breakeven point to be in the 33-42 month range. Most average 60 months or more, and I feel that is a stretch for most people. A lot can happen in 5 years. For most people, unless the extra money is available, a lower payment is necessary, or unless you plan to keep the home a long time, buying down the rate may or may not be the best option.

When deciding on a rate and cost, calculate your own breakeven point and see if it makes sense in your situation.

CA MB,

Great, concise, and straight forward explanation.  I almost want to cut and paste it onto my web site.

BP,

CLIFF NOTES: NO..

If you are similar to most other Americans... you will; simply not outrun the upfront money.  We hear/read different  twists in the math to make the case for buying it down.  If you want to: go ahead, but the PV and FV are exactly the same when using the same rate..  People who hat points say they will get 10-12% in the market as promised via charts from some of my esteemed peers... They pay no points as they are WALL ST wizards... Others, think there is ) value in their own investments and pinky promise us all they will be there to collect Social Security and that they have dug their own burial plots in the backyard... 14 months later, they get "transferred" or add a room on.. loan paid in full and the upfront point money is swirling with the Charmin if you get the picture.  I have been doing it 20 years... for my "A" fixed raters... less than 10 paid any points at all.  The 2 I just closed form ZILL recently... 0 orig.. 0 discount.  I wish you well in your decision.  Keep rockin'.  Mornin' Matt... Enjoyed the Beijing show this a.m.

If I may piggyback on this discussion (I was going to start a different thread) ... There's nothing mentioned about the amount of interest you will save with the points. Won't that make a difference? For example, if one pays $5000 in points, won't the time at which $5000 is saved from the interest payments (in comparison with the original loan rate) be the break even time? The whole reason for paying points is to save on interest payments, right?

Correct MS. The ave life of all mortgages is about 6 years. Rates go up and rates go down in cycles. The last client that I worked with who really really wanted to pay points paid 2 ($5000 worth) and refinanced about 1.5 years later to a lower rate with nopoints/noclosingcosts when rates eventually came down. A complete waste of money IMHO although the homewowner was able to itemize those points on their taxes the year they paid them.

One other variable to consider. When you purchase a property, there will be many other things needed for your home. Furnature, paint, carpet, tile, fixtures, appliances, mechanical system repairs ect. You should also also weigh what is needed and the cost as well. Somewhere out there is a statistice that someone who purhcases a home will spend about $15K after the purchase on these types of items. Money for points could help reduce credit card debt that might be run up on these items later.

So essentially, if I had $5000 burning a hole in my pocket, I would be better off paying $5000 towards principal in my first installment than buying points? Then, if I decided to refinance later, I wouldn't be out that money?

MS,

Your decision is the correct one at time of closing. However, you will only know way way way down the line looking in your reear view mirror if it was the best one..  PMI can be paid for (when needed) with a single payment upfront... Most people would pass out at the thought and loathe paying it even montly, but the same argument can be made in that math problem.  Most people do not want to "prepay" anything. We are a pay when we use it gorup.  Prepaying is fine, but the money is gone and we as professionals know all too well that the vast majority of pinly-promising, I'm beating the system borrowers do not beat the system at all.  That's why I caution people to not hypnotize themselves with their own math as they will make sure they get the numbers they want to justify the decision.. With your 5 pointss (I remember your thread)... I would furnish my home with CASH personally.  Good luck to you and others with that decision.  One last little food for thought  for all, not MS or BP in particular...Why do we have discussions about paying massive points and minimal to no down payments?  Those seem so contradictory. We have threads with "money to burn" and threads with not a cent to their name.  Gotta love this place.  Keep rockin'.

Err ... I hadn't asked any questions about points before this one. I think you're confusing me with the Paralysis Analysis thread writer (and no, my brain doesn't go that far with math).

Sorry MS...  I did get you confused.. There was another person with a 5 point bag of cash that had all the math done prior to sharing his theory with us.  No worries.

Mortgage Shopper, I am with the camp that says dont buy it down. The rates will come back down later and you will get the lower rate anyway. Keep the 5K. Dont " spend " it on refinancing either. Drop your mtg later on no cc loans, every time it moves down 3/8.  

Read again from above:

 The last client that I worked with who really really wanted to pay points paid 2 ($5000 worth) and refinanced about 1.5 years later to a lower rate with nopoints/noclosingcosts when rates eventually came down. 

With your 5 pointss (I remember your thread)... I would furnish my home with CASH personally.    I like that one!

For any consumer just remember that once the money is spent ad the closing table, regardless of terms and parting gifts... the money is gone forever... No refunds of any kind (Not escrows for taxes and unused insurance).  There is nothing wrong with paying it, but it is gone forever when the ink dries.  Keep rockin'.

Thanks, lenders. You have answered one of my pressing questions. Are there fixed rate no closing cost/no points refinances?

Original poster, if I'm hijacking your post, let me know and I'll start another thread.

Ok let me see if I understand what you are telling these borrowers: Don't pay points to buy down the rate? Tell me if my numbers lie on this example and rethink your perspective.

Purchase Price 250,000

Loan 200,000 (20%)

Rate 6.5 (No Points P&I $1,264.14

Interest paid in 1st YR. $13,000

Same Numbers

Rate 5.75 ( 3 points) cost $6,000 P&I 1,167,15

Interest paid 1st Yr $ $11,500

Difference $1,500 Interest Savings

Payment Savings 1,164

Tax Savings 28% 1,680 Costs $6,000.00

Total $4,524 Savings 4,524.00

$1,476.00

From my perspective it's a no brainer. Imagine waiting for rates to go lower how long would you wait, why have the cost of a refinance. In the 2nd year begin make an extra $237 per month towards principal interest savings grows another $1,500 compared to the NO Point Loan.

MS, no closing cost loans are no points, they are no closing costs at all. You should post a quote inquiry and put in your notes, Quote No Points and also No Closing Cost Loan ( 2 different loans ). Bring the quote request # back to the thread, after you post it.

Yes.. rate is slightly higher to 1) Pay the broker the same wage and pay the additonal costs you would normally pay yourself or finance... Good rule of thumb for FL....375% above a NO POINT RATE... Again, the long-term answer is a factor of time.... We get (or at least I do) paid the same as I am really just doing a job for you.  Not on you, but for you and you are making the decision that best meets your needs.  Hindsight.. I am 5 years into 15 year term...yippee for me...  may receive a nice payoff of a mortgage I hold... in the next 3 months.. Had I paid points ( I did not in this case), but had I  for entire 15 years... upfront, but paid it off in year 5 (same as selling or refinancing).. I would have lost, but we just don't really know or can predict the future. We barely know what is for dinner tonight in advance.  keep rockin'.

PM, I look at it like this. Seller is paying $6,000 in concession to buy the rate down to 5.75% from 6.5%. I would recommend applying the same 6K to reducing the sales price from 250k to 244k. After 5 years, the balance on the 244k Loan would be 181,605 vs the balance on the 5.75% loan at 185,524. There was a savings of 59.06/month x 12 x 5 yrs on the payment so that is $3543.60. Balance difference was $3919 so the 6.5% is still better after 5 yrs. I use 5 years because within that time frame, rates should have moved back down below the 5.75% level, enabling no cc refi's. There is no tax advantage of the $6,000 used to buy down the rate because the seller paid the points, not the borrower.

Good post Clay.

UL didn't you know Buyer can take the deduction for points paid by seller.

PM, thanks, I didn't know both the seller and the borrower could use the same write off. That changes the #'s so I have to go back and redo some figures to find out where it pays for itself. I see the borrower has to hold the property for 2 years or the deduction is recaptured in their cap gains calculation. That would be different on a refi ( even though we are talking purchase here) as the points have to be spread out for the term of the loan. Something else to think about is those IRS rules may change along with the hit for cap gains and time to hold primary res., depending on what happens in Nov. Will play with those #s after I get something approved this afternoon.   

Good for you I hope it is not a tough case.  The rule won't change its been there a while and the housing still has to be good buy the tax advantages make it a good buy.  Also, when you pitch this to a realtor you do not have to reduce the price seller buys down the rate and it saves the purchaser more money than reducing the rate (monthly).

Just makes more HOCUS POKE US numbers... Writeoff/schmiteoff... lower the PRICE!!  If it means nothing more financially to the LO, I think the way to do it is to keep it simple.. Complexity is not what a homeowner or buyer needs.  They just want a home and a loan that they understand and can count on.. A bad sign is just what you said Clay....  I'll have to go back to redo figures...  That is complicating.. not wrong, but complicating and for what... a net after tax rate schedules of 28% versus 25% with an Obama election victory parlayed with the troops coming home from Iraq will save you "X" mr Jones from the 62.4th month going forward...  What, you might move...well let me refactor that scenario...carry the 6. minus4  add the decimal and dewey... It makes for a circus.. It is like attempting to tailor clothes for Mary-Kate Olsen today for the Oscars next spring and she is now living in a hostel above a Dunkin Donuts.. Who knows what size she will wear then... Good luck though.

I just dont believe buydown points to be worth it due to so many various factors. Unless you are buying down at already rock bottom historic prices, then many follies can occur.

You can buy down from 6.25 to 5.5 % for 3 points , but what if rates go down to 5.5 % ?

What if you only buy down 1 point to 6% , then rates go down to that next week?

The only scenerio where it works is when your rate is already the lowest it will ever be , then bought down some more.

Some folks are under time restraints , purchase etc.....but its a different motivating factor.

In the end, we are rolling so many dice that it isnt even a science anymore. So I would simply take the par rate without buydown points. Its the same gamble as anything else.

There is the answer T.. simply take the par rate... SIMPLY.. I like that..  Buying points for a loan from JUN of 2003 and still going... You are the winner... It is like trying to time stock prices..

OR you could not buy the points down, have a rate of 6% this week and it GO UP to 6.5% next week.  Then would it "simply" be ok to buy the rate down?

cont.   Then would it "simply" be ok to buy the rate down to what it was to begin with?  (assuming the rate was not locked in-obviously)

Martin.

Agreed. I give my clients a choice. Either take the par pricing wholesale and pay me a point on the front, or incorporate the point into the pricing. I never encourage buydown points.

Whether or not you buy points is a function of how long you will keep your mortgage. Generally it will make more sense to buy points if you plan to hold onto your mortgage for a long time, and you can calculate the breaken number of years for buying points to make economic sense. 

Here is how to determine a breakeven point.

"1. Calculate the amount of your monthly payment at the interest rate you will be charged if you do not pay points.

"2. Calculate the amount of your monthly payment at the lower rate if you do pay points.

"3. Deduct the lower payment from the higher payment to find the amount saved each month.

"4. Divide the amount charged for points at closing by the monthly amount saved. The result is the number of months you must keep the loan to break-even on paying points."
About.com continues with an example, showing the breakeven mortgage hold period for buying 1 point on a $100,000 30-year 7.5% loan is 117 months. If you hold the mortgage less than 117 months, it won't make economic sense to have purchased the points.