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Should you pay points on your loan?

One of the biggest aspects of a home mortgage is the interest rate. This little number is going to determine the cost of the money that you are borrowing, kind of a big deal. Of course, you want to try and get the lowest rate possible when shopping for a home loan and I have news for you; almost every lender can get you locked in at a rate far below the going rate. I know what your thinking, its magic! Well, not exactly.

Each day rates come out and there is what is called “Par” rate. This is the rate that is offered by the lending institution without charging points. Whoa! Point what is that? A point is equal to 1% of the loan amount. For example, 1 point on a $100,000 loan would come out to $1000.

The rate sheet will have the par rate as stated above but it will also have lower rates that would require points to lock in at and also higher rates that would offer a rebate at closing towards closing costs. Think of it this way, Johnny Homeowner is purchasing a home and is taking a loan out for $100,000. He can discuss with his loan officer about locking in his rate at par(0 Points), at a rebate(higher rate but would receive a rebate at closing), or Paying points (paying to get a lower rate)

When locking in at a higher rate, what you want to look at is the benefit vs cost. For example, I was able to get a loan for one of my clients in 2015 with zero out of pocket expenses. Yes, that’s right Zero, zilch, nada. He put down $2500 in earnest and walked away with a $2500 check at closing. How do you ask? By pricing out the loan so that I was able to cover all of his closing costs and he was able to get a loan utilizing USDA 100% financing for nothing out of pocket! For my client, the benefit of getting into the home at zero cost was more important than taking a lower rate. Some might have a different opinion, but isn’t that what makes the world go around? J

On the flip side, when is it a good Idea to buy down your interest rate? Again, we are going to be looking at cost vs. benefit.   So lets say that you can get locked in at a par rate of 3.5%, but if you spend an extra $1500 you can lower your rate down to 3.375%. When determining whether to buy down a rate or not, always boils down to time. If spending the $1500 is going to save you $10 per month on your payment, it would take you 150 months to recoup your cost of buying down. That is 12.5 years. What this means, is that if you stay in the home for more than 12.5 years it was a good idea to buy down your rate; however, if you sell or refinance prior to that 12.5 year period, you would have lost money on your investment.

Buying down a rate or getting a rebate at closing is a very personal decision. Remember always to weigh cost vs. benefit. That is key. My opinion is that if it is going to take you more than 5 years to recoup your cost of your buy down, it is not a good idea. Hope you found this helpful.

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