NEW YORK – Jan. 10, 2017 – Though mortgage rates have jumped in recent weeks, it's still possible for buyers to get a lower rate if they "buy the rate down," also known as "paying points."
But they should weigh the pros and cons carefully to decide if that's the best move.
"Buying your rate down, or 'paying points,' means you're paying an extra fee on top of standard loan fees like appraisal, underwriting and a credit report to get a lower rate," Julian Hebron, executive vice president of sales and marketing at RPM Mortgage, tells CNBC. That means your clients will need to bring more cash to closing. A point is 1 percent of the amount of a loan. So for a $200,000 mortgage, a borrower paying 1 point would bring $2,000 more to the table.
"If you were getting a 30-year fixed loan of $325,000, you might get two options with and without points," explains Hebron. "Today, the option with zero points might show the rate as 4.25 percent, and the option with 1 percent in points – equal to $3,250 – might show the rate as 4 percent. Paying $3,250 at closing to lower your rate by .25 percent lowers your payment $42 per month and lowers your interest cost $68 per month."
Before your clients start paying points, however, financial experts say they should think about how long they expect to be in the home and what their savings would be. Matt Weaver, vice president of sales at Finance of America Mortgage, says he can help borrowers consider it with a simple calculation.
"We can calculate this figure by taking the dollar value of the buy-down and dividing it by the monthly savings from the lower interest rate, then dividing that figure by 12 months," Weaver says. "So as an example, let's say our prospective homebuyer will need to pay $2,000 in buy-down to generate $30.00/month in savings. If we divide $2,000 by $30, we would conclude it would take 66.7 months, or 5.5 years, to recoup the cost of the buy-down. Now you can ask yourself, 'Do I reasonably foresee myself staying in this home for at least 5.5 years?'"
Source: "Rising Mortgage Rates Making You Nervous? Here's How to Lower Yours," CNBC (Dec. 29, 2016)