Tips For Buying A Home
- Buying a home is no small feat, so it can be helpful to work with a financial advisor to figure out your finances beforehand. Finding a qualified financial advisor doesnt have to be hard. SmartAssets free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If youre ready to find an advisor who can help you achieve your financial goals, get started now.
- Before you fall in love with your dream home, figure out what prices are actually within your budget. To help you out, check out SmartAssets how much home can I afford calculator. All you need to know is where youre looking for homes, your marital status, your annual income, your current debt and your credit score.
- SmartAssets no-cost closing cost calculator will help you understand your total closing costs and amount needed at settlement.
Why Use Basis Points Versus Percentages
The advantage of using basis points over percentages has to do with the fact that its a distinct figure that remains constant as compared to a ratio. If I said that the price of a candy bar had increased 25%, that doesnt tell you everything you need to know. 25% relative to what? Is that a dollar or $10?
Basis points give you a form of absolute. No matter how much money is invested or the size of the loan, you can say the price or yield has gone up by 50 basis points and investors will know what that means.
Rebates Can Be Good For Refinancing Too
Using rebates, a loans complete closing costs can be waived, allowing the homeowner to refinance without increasing their mortgage amount.
When mortgage rates are falling, zero-closing cost mortgages are an excellent way to lower your rate without paying fees over and over again.
You could potentially refinance three times in a year or more and never pay fees to the bank.
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A Gift From A Family Member
For borrowers who are short of cash beyond the down payment, and where the seller is unwilling to pay closing costs, those costs can instead be paid by a gift from a family member.
In fact, the family member can make a gift specifically to cover discount points to lower the interest rate on the loan. This can be done even if the seller pays other closing costs, or if the lender uses premium pricing.
If a gift from a family member is used, the lender will want the family member to execute a gift letter spelling out the amount of the gift, the source of funds, and when it will be paid.
Its also likely theyll want to verify the source of funds, with a copy of a bank statement or a direct account verification from the bank itself.
How Mortgage Points Work
Pamela Rodriguez is a Certified Financial Planner®, Series 7 and 66 license holder, with 10 years of experience in Financial Planning and Retirement Planning. She is the founder and CEO of Fulfilled Finances LLC, the Social Security Presenter for AARP, and the Treasurer for the Financial Planning Association of NorCal.
Mortgage points are used in the loan closing process and are included in closing costs. Origination points are mortgage points used to pay the lender for the creation of the loan itself whereas discount points are mortgage points used to buy down the interest rate of the mortgage.
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How To Save Money On Closing Costs
Not all closing costs are set in stone. There are certain costs that you may be able to negotiate or transfer to reduce out-of-pocket costs and your monthly mortgage payments. Some things you may want to consider include:
- Ask the seller to pay for your closing costs. This is the easiest way to save money on closing costs. If youre in a buyer’s market, the seller may be more likely to cover your costs.
- Shop around for lenders. Different lenders offer different rates and charge varying fees. If youre not satisfied with your initial offer, it’s okay to shop around.
- Close near the end of the month: You can choose when you close on your home. Closing costs consider when you move into a home and prorate what you have to pay based on when you sign. The later in the month you close, the lower these prorated costs will be.
- Lock in your rate: Mortgage rates are variable and depend on the market. If you think rates might go up, you can pay to lock-in your rate for a certain amount of time. If you think rates might go down, you probably want to skip this cost.
Buying a home should be an exciting time in your life. While it’s easy to get overwhelmed by all the line items on your loan, a qualified home lender will be there to guide you through every step of the process. For more information about closing costs and the homebuying process, speak to a Home Lending Advisor.
When To Buy Mortgage Points
Buying mortgage points might make sense if any of the following situations apply to you:
- You want to stay in your home for a long time. The longer you stay in your home, the more it makes sense to invest in points and a lower mortgage rate. If youre sure youll have the same mortgage for the long haul, mortgage points can lessen the overall cost of the loan. The longer you stick with the same loan, the more money youll save with discount points.
- Youve determined when the breakeven point is. Do some math to figure out when the upfront cost of the points will be eclipsed by the lower mortgage payments. If the timing is right and you know you wont move or refinance before you hit the breakeven point, you should consider buying points.
How To Calculate Your Breakeven Point
Lets run through a quick example using the numbers referenced earlier.
If you have a $200,000 loan amount, going from a 5.125% interest rate to a 4.75% interest rate saves you $46 per month. As mentioned earlier, the cost of 1.75 points on a mortgage with a $200,000 loan amount is $3,500. If you divide the upfront cost of the points by your monthly savings, youll find that your breakeven point is about 76 months , which is equal to roughly 6 years and 3 months. So, if you plan to stay in your house for longer than that amount of time and pay off your loan according to the original schedule, it makes sense to buy the points because youll save money in the long run.
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How To Pay For Mortgage Points
A borrower who pays discount points is likely to have to meet these costs out of pocket. However, many scenarios exist, particularly in buyers real estate markets, in which a seller offers to pay up to a certain dollar amount of the closing costs. If other closing costs, such as the loan origination fee and the title insurance charge, do not meet this threshold, then the buyer can often add discount points and effectively lower their interest rate for free.
Reducing your mortgage interest rate with discount points does not always require paying out of pocketparticularly in a refinance situation, in which the lender can roll discount points, as well as other closing costs, into the new loan balance. This prevents the borrower from coughing up more money at the closing table of course, it also reduces their equity position in their home.
Because the Internal Revenue Service considers discount points to be prepaid mortgage interest, they generally are tax deductible over the life of the loan. If they and the home purchase meet certain conditions, then they can be fully deductible for the year when they were paid.
The Seller Pays The Points
This practice is more common in slower housing markets, and with lower-priced properties.
The sellers may offer to pay some, or all, of your closing costs, including points, to entice you to purchase their home.
But what the seller can pay differs based on the type of loan you have.
- For FHA loans, the seller can pay up to 6% of the sales price, regardless of the down payment made.
You should be aware, however, that while sellers may willingly pay a 1% origination point, they may be highly reluctant to pay discount points. Thats because discount points are more about providing you with a lower interest rate and payment than they are about directly facilitating the sale of the property.
Also, sometimes the property seller is a builder. As the seller, the builder can cover the buyers closing costs within the same limits listed above.
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When To Pay Points
Origination points typically arent charged on most loans and typically company specific. For example, traditional banks that happen to do mortgages often charge origination points on every loan. This is how they make additional money. In contrast, most mortgage bankers dont charge origination points.
Discount points are more specific to the loan and can be charged for a variety of reasons. The most common instances where discount points are charged are when escrow are waived, when credit scores are low, or when someone wants to buy down the interest rate.
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A Recession Hasn’t Hit
Many financial experts have cautioned that the U.S. economy could take a dive in 2023. If that happens, it could lead to an uptick in unemployment levels. And that could push buyers out of the market — buyers who are otherwise able and willing to purchase a home today.
That’s a situation worth getting ahead of, as it plays into the whole concept of supply and demand. You want to sell your home when demand is high. If a recession hits, buyer demand could drop significantly, even if mortgage rates come down. Not only could buying be off the table for those who wind up unemployed, but even financially healthy buyers might choose to delay their plans due to not wanting to take on that commitment at a time when the economy isn’t doing well.
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How Mortgage Points Affect Apr
Banks will sometimes use a mortgage shopping tool known as APR to make a loan with discount points look more attractive than it really is.
APR, which stands for Annual Percentage Rate, is a calculation that shows the long-term cost of holding a mortgage.
But APR also assumes youll hold your loan for 30 years and pay off the total loan amount on schedule. Very often, you will not, which nullifies the APR math.
This is why its important to remember that your APR is not your mortgage rate.
Comparing loan estimates using the lowest APR method is rarely a good plan. It uses discount points against you.If youre not clear how much youll pay to borrow, ask your loan officer to walk you through your Loan Estimate or a truth-in-lending disclaimer.
What Are Todays Mortgage Rates
Todays mortgage rates are at historic lows. Mortgage points allow borrowers to buy down their interest rate even further, which can generate huge savings.
However, mortgage points arent always worth it. And if you opt not to pay for them, youre still likely to get a great deal in todays ultra-low rate environment.
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What Are Negative Mortgage Points
Just as paying points reduces your interest rate, increasing your interest rate will decrease the number of points.
Mortgage points can go negative. For example:
Lenders often use the negative points to buy down the closing costs.
Based on the previous example, if the loan amount is $100,000 x 1% = $1,000. The lender uses that $1,000 toward the borrowers closing costs.
Keep in mind that the interest rate was increased to obtain the lender subsidy.
The Bottom Line: Mortgage Points Can Save You Money
Though mortgage points and prepaid interest are right for some borrowers, they dont make financial sense for everyone. To determine whether you can save with discount points, you have to crunch the numbers.
Sit down and assess your budget, down payment, loan terms and future plans before you close. Determine your breakeven point and your likelihood of staying in the home to understand if discount points will save you money in the long run when refinancing or buying a home.
If youre ready to buy a new home or need to refinance your existing home loan, dont wait. Apply online with Rocket Mortgage®.
Take the first step toward the right mortgage.
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Know About Fha Discount Points
Mortgage lenders often offer borrowers the opportunity to lower their mortgage loan’s interest rate through the purchase of discount points. A single discount point on a mortgage is equivalent to 1 percent of the mortgage loan’s value. For example, purchasing one discount point on a $600,000 mortgage loan would cost $6,000. As long as sellers stay below the FHA-mandated 6 percent maximum contribution ceiling, they can pay the buyer’s discount points.
About Mortgage Discount Points
Discount points are a common feature of mortgages, but they can be confusing for many borrowers. Just how do they work?
Discount points are a type of pre-paid interest. So by paying part of your interest up front, you can get a lower rate. And what you save in interest over the long haul can be a lot more than what you paid for the points up front. The question is, will you save enough to make it worth the initial cost?
The key is to calculate the break-even point how long it will take for your interest savings from a lower mortgage rate to exceed what you paid for your discount points. If you can recoup your costs in five years or so, thats often a good deal.
A big consideration is how long you expect to have the mortgage. If you sell the home or refinance the mortgage before reaching your break-even point, youll have lost money. Or if you do so only a year or two after reaching it, your savings might not be enough to make it worthwhile.
Discount points work best for someone who expects to stay in their home and not refinance for a long time. Over 20-30 years, the savings can be substantial in the tens of thousands of dollars. However, if it takes a long time to reach your break-even point, say 10-15 years, you have to ask yourself whether the small savings youll realize each month are worth the trouble, even if you expect to stay in the home longer than that.
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Should I Pay Discount Points To Get A Lower Rate
That depends. Paying for discount points to get a lower interest rate could be a good financial strategy if you plan to live in the home long enough to cover the breakeven period. The upfront costs need to bake out before the savings can kick in. If you move or refinance before that period is up, they are worthless.
This article was updated on Sept. 4, 2020, to remove comments made by a source whose credentials do not meet NextAdvisor editorial standards.
Can I Afford It
Another thing to consider is the price itself. The $2,500 for points is on top of your down payment and other closing costs. If you qualify for a low- or no- down payment loan, the additional cost for points may be something you can afford.
When it comes to making a decision on purchasing discount points, it comes down to how long you plan on staying in your home to see the long term savings, and if you can afford the up-front cost.
The bottom line if your lender decides to charge you origination points, these are to some extent, negotiable, but not optional.
Discount points are completely optional for the homebuyer. Some lenders dont charge origination points, but rather a flat origination fee. In this case, you wouldnt have origination points, but would still have the option to utilize discount points.
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Mortgage Discount Points Vs Apr
Buying discount points on your mortgage is effectively a way of prepaying some of your interest, and looking at the annual percentage rate can help you compare loans with different rate and point combinations. The APR incorporates not just the interest rate, but also the points you pay and any fees the lender will charge. Check out a quick explanation from Greg McBride, CFA, Bankrate chief financial analyst:
Should You Pay For Mortgage Points
It seems odd to say, but buying mortgage points to lower your interest rate could actually be a complete rip off. Say what? How can a lower interest rate be a bad deal?
For starters, it could be years before you really save any money on interest because of your mortgage points. To see what this would look like, youd first need to calculate whats known as your break-even point.
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