Zillow Advice: Refinance - Breaking even when buying points

Thanks for all the info guys. ...

Mon, 15 Jun 2009 20:20:00 GMT

Thanks for all the info guys. I'm slowing understanding more.

Please correct me if I'm wrong, but I think interest saved due to buying down a rate should be taken into account, as well as the increase in taxes I will pay due to paying less interest. This is very different from what most online calculators and even some people in this thread say: to just divide the cost of the points by the monthly savings.

James, thanks for the calculator link. I have looked at many calculators but none were as good as the one you linked. I am pretty sure it takes into account interest and tax, which is great. It is telling me 50 months to break even (assuming 28% tax rate since I'm not sure).

The calculator also uses savings interest, but I'm not sure exactly how that is figured. Is that the interest I would have earned on my money if I didn't pay points?

Clay, my existing rate is 6.375% on $422k and 8.3% on $105k. I did an 80/20 on $540k originally, on 11/2006. I'd like to consolidate the two mortgages into one. I used $540k in my original question in this thread as just a rough estimate. I have about $16k in cash. That is my emergency money, but my employment looks to be pretty stable, so I could put it into refinancing if it would really help. As for the closing costs other than the discount points, I don't have them in front of me. I know for sure there is a 1% origination fee and ~$9000 for the FHA upfront MIP. Other costs should be typical for my area (Seattle). I can post them tonight if you'd like. We are actually waiting on an appraisal to get more solid numbers, we have been waiting a couple weeks.

Mark, good point about pushing the loan out to 30 years. We have had our current loan since November 2006. While I have ~$16k in cash, I just have it sitting in a money market account collecting dust. It makes something like 1.2% currently. I wish I knew more about how to invest the money. I would want to do something reasonably safe. I could put it in a CD and earn ~2.3%.

Thanks again for all the info so far! I would love to hear anything else you'd like to contribute.

The break even is even further ...

Mon, 15 Jun 2009 12:51:00 GMT

The break even is even further out than stated below due to the tax deductibilty of the higher payments, the fact that a lot of the 'savings' is actually due to pushing the amortization out to 30 years again, and the fact that you are not taking into account the lost 'opportunity cost' of the 13-14k (if you invested this money instead). The actual break even is at least 6 years and, depending on your current loan term and tax rate, probably much longer. I rarely recommend paying points.

Mike, the payment at 4.5% ...

Mon, 15 Jun 2009 10:53:00 GMT

Mike, the payment at 4.5% is $2736.19, not $2578.04. N4te had it right at 42 months to recover the buydown.

N4te, what is your existing rate and how much are the closing costs aside from the discount points?

n4te. Heres a link to a site ...

Mon, 15 Jun 2009 02:49:00 GMT

n4te.

Heres a link to a site that has that calcualtor on it.
www.mtgprofessor.com/calculators.htm

Dear N4TETo clarify your ...

Mon, 15 Jun 2009 02:39:00 GMT

Dear N4TE
To clarify your question further;

If you financed $540,000 at 5.5% on a 30-year fixed the payment would be $3,066.06.

If you financed $540,000 at 4.5% on a 30-year fixed the payment would be $2,578.04.

The payment difference is between these two rates is $488.02. If it cost you 2.58% (or points) of the loan amount to obtain that rate that would be a cost of an additional (as you have noted) of $13,932.00 in over your regular closing costs.

To figure the break-even point simply divide the additional costs or points by the monthly savings

$13,932.00 / 488.02 = 28.55 months (or a little under 2.5 years) to recapture the up-front costs to buy down the rate. Every month after the 29th month you are going to make money on the buy-down.

The real question you need to ask yourself is how long you intend to stay in your house. For example, if you are only planning to stay in the house five more years after refinancing you are wasting your money in my opinion, because you would spend $13,932.00 in buy-down points, recapture that $13,932.00 in 2.4 years and only get 2.6 (or 31.45 months) more years of savings at 488.02 per month.

Effectively, you would spend $13,932.00 to save $15,348.23 – not that great of a deal in my opinion.

However if you intend to stay in the house for say 15 years your return on your $13,932.oo is going to be vastly different. You would invest $13,932.00 to make $73,911.00.

The longer you stay in a property AFTER the buy-down is recaptured the greater the benefit.

There is no hard-and-fast rule to when a the buy-down benefits make sense. Every borrower is different but my rule of thumb is a buy-down must pay for itself twice over to make sense.

For example, in our previous scenario in my opinion the buy-down would have to yield $27,864.00 after the original $13,932.00 was recaptured before I would consider it reasonable. In other words, the borrower would have to stay in the house for 86 months or a little over 7 years months for the buy-down to make sense.
Hope this helps?

Mike Carpenter
Mike the Money Man
mikethemoneyman.com

here is one they dont do ...

Fri, 12 Jun 2009 09:08:00 GMT

here is one they dont do for you, take the 14,000 you spent on points, which you get no equity from and plow it into your home, you will save 100/month this way over the 540k base that the original calcs are done on(this is more dramatic with lower 200k homes but still applies i think)

this in turn reduces the net gain from 330/month to 260 since you are missing out on paying the lower principal by sacrificing your down payment for points, the actual break even time is NOT 42 months (3 years 6 months) but in fact 52 months (4 years 4 months) and it should also be pointed out that after 22 months (1 years 10 months) you will have earned back 14000 in equity and up to that point you have lost money.

of course with principal falling the equity can be wiped out either way so if you refuse to wait for the knife to hit the floor so that you can pick it up safely, buying points probably still makes more sense

n4te,In your original math, ...

Fri, 12 Jun 2009 06:35:00 GMT

n4te,

In your original math, your interest paid in 18 month is actually wrong. Since every month you are paying principle as well.
Anyway for a 540K loan,
4.5% in 18 month, you will paid $36033.73 in interest
5.5% in 18 month, you will paid $44125.21 in interest
Difference is $8091.48. and you taxes would increase by $8091.48*(you tax rate). So the saving in interest is less then the difference.
You would also have paid more in principle on the 4.5% loan.

The truth is that you will ...

Fri, 12 Jun 2009 06:19:00 GMT

The truth is that you will really need a spreadsheet to do this calculation.
You tax rate will play a role because the mortgage interest is tax deductable and so is the points paid (amortize on the life of the loan). But this usually reduces the real saving per month since the higher interest leads to less taxes.

Anyway, I did a very quick spreadsheet and if your tax rate is at 28%, it your first month's saving is really only $214.80 and will take you 65 months to break even on the points using simple addition of savings per month. It gets more complicated when you talk into account inflation rate.

Of cause, you could do different option like Hoang said and there are many options on how you structure your payment. That is why I said you really need a spreadsheet to do the calculation that may fit your situation.

I actually find it very odd that mortgage professional does not take taxes into account when talking about buying down rate.

I'm in the middle of doing a refinancing, and when I first started asking for quotes, I got about 20 different people calling me and only 1 was able to explain to me that it actually take much longer to break even on points when taxes are taken into account.

I don't know how much for ...

Fri, 12 Jun 2009 02:41:00 GMT

I don't know how much for the closing cost, therefore I don't take the closing cost into account.

Hi N4te,If you pay "the buy ...

Fri, 12 Jun 2009 02:23:00 GMT

Hi N4te,
If you pay "the buy down point" up front, as your calculation, you will recoup after 42 month.
And if you choose the buy point to built in the mortgage:
1st -> $540,000 at 5.5% monthly mortgage payment is: $3,066.06
2nd -> $540,000+$13932 = $553,932. At 4.5% monthly mortgage payment is: $2806.69
Beside of the principals break even at 104th month, You save $259.37 a month.
3rd -> If you keep pay $3,066.06 a month ( mortgage amount $553,932 at 4.5% rate ), your pay-off is after 302.3 month ( save almost 58 months), and the principals break-even point is at 34th month.
You will not pay "the up front money" for the buy down point neither 1st, 2nd nor 3rd ( options )