Should You Pay Points When Getting a Mortgage?
With interest rates at or near record lows and so many people buying or refinancing, the question always arises: “Is it worth it to pay points in return for a lower interest rate or to accept a lender credit to apply toward closing costs”?
The answer isn’t the same for each borrower and your mortgage professional should present the options to each borrower to demonstrate the difference and guide them to the best decision.
Here’s what you should know:
- Paying points enables a borrower to “buy down” the interest rate on a mortgage in exchange for an upfront fee.
- A point equals 1 percent of the loan amount, so paying one point on a $400,000 refinancing costs an extra $4,000 at closing. Paying a point usually reduces the interest rate by 0.25% over its term, so for instance, instead of 4 percent, the rate is 3.75 percent.
- The average points paid in the last 3 years according to a Freddie Mac survey, was 0.7
- To decide if paying points is worthwhile, borrowers should consider two key decisions: How long they plan to live in the home, and how much they can afford in closing costs.
- In most cases, if the borrower plans to live in the home for at least five years, paying points will help the homeowner to reap savings in the long run.
- Lenders also offer a rebate or credit in exchange for accepting a slightly higher interest rate. The lender agrees to give the borrower a credit, which is used to pay for closing costs. As with points, a credit of 1 point will typically result in an interest rate .25 percent higher.
Mortgage Brokers Rapidly Regaining Lost Share
Mortgage Brokers captured 11.4% of the origination market in the fourth quarter of 2011, up 67 percent from their low point of a couple of years ago, according to survey figures compiled by National Mortgage News and the Quarterly Data Report.
“This appears to be a clear indication consumers are returning to the personalized service and competitive pricing offered by mortgage brokers,” said Marc Savitt, a past president of the National Association of Mortgage Brokers.
Being the most highly regulated segment of the origination process, mortgage brokers can generally offer several advantages over the large banks:
- A wider variety of programs to offer
- Can shop among many lenders for the best rates and terms
- More personalized, local service
- More experience than most bank loan officers
- Stricter state and national testing and licensing requirements that are not required of bank loan officers