Should Borrowers Pay Points?

In Worldwide Capital Mortgage Corp. we always give you the option to participate and decide what the best deal for you. 

Many borrowers ask the question: Is it in our best interests to pay upfront points when buying or refinancing a home? Short answer: it depends. There is no hard and fast rule.

It's a shame that many misguided "rule of thumb" answers are still circulating at the family barbeque or being touted within the trusted walls of the accountant's or attorney's office. At Worldwide Capital Mortgage Corp, we think that the real answer depends mostly on the borrower's plans for remaining in the home and their budget. There is a simple test that a borrower can conduct themselves to see what's best for them. Read on.

First...what are "points"? A point is one percent of the loan amount, paid by the borrower at closing. This percentage can be paid either out of their pocket upfront, or taken directly out of the proceeds of a refinance loan. One point paid on a $200,000 loan would cost a borrower $2,000; two points would cost $4,000, etc.

So, a point typically means that more money is required at closing. So why pay points? What advantage does that give the borrower?

Just as you consider the bird in the hand to be worth two in the bush, so does the lender.

With the assurance of points paid upfront to Worldwide Capital Mortgage Corp, the lender is willing to offer a lower interest rate to the borrower. In other words, points can be used to "buy down the rate". On a long-term loan commitment, the one or two percent paid upfront can mean tremendous savings for the borrower over the lifespan of the loan, due to lower interest rates against a large principal sum.

The most common misconception among borrowers is that "no points upfront equal a better deal for them". This common bias against paying points can actually work against the best interests of the borrower. The real answer depends on three variables:

ü      How much lower is the rate as a result of paying points upfront?

ü      How long does the borrower have to stay in this mortgage to recoup and ultimately come out ahead?

ü      And finally, if the borrower is planning on holding the loan past the break-even point, can they afford to lay out the money to pay the points comfortably?

A loan without loan origination points paid carries an inherently higher rate and therefore a higher monthly payment. So, if a borrower pays points to Worldwide Capital Mortgage Corp. the closing fees will be higher, but the monthly payment will be lower, thus creating the "break even point" for having paid points.

The break-even point is the time after which the investment of points to "buy down the rate" is overcome by the accumulated monthly savings which result. If the borrower then holds the loan past this moment, paying the loan origination points becomes a good investment and saves the borrower money. If however, the borrower refinances the loan or pays off before the break-even point, paying the points becomes a financial loss.

Here's an example using a $250,000 purchase mortgage:

a) $250,000 (0 points paid) @ 6.5% = monthly payment $ 1,580

b) $250,000 (1 Point paid, $2,500 upfront) @ 6.0% =monthly payment $1,498

Option b costs $82 dollars per month less than option a. Therefore; the $2,500 in points will break-even in 30 payments. Each payment beyond payment 30 saves the borrower an additional $82 above the cost. If this borrower held this loan for the remainder of the thirty years paying points would have netted them a total savings of $27,060. This is a huge benefit for the borrower.

Worldwide Capital Mortgage Corp always recommend that what borrowers must avoid at all costs are "rules of thumb" such as "never pay points" which simply ignore beneficial strategies that can really pay off for a borrower under the right circumstances. These rules are oversimplified and meant to cover all situations and borrowers in exactly the same way. And they are wrong.

Instead of hurting yourself by ruling out origination points, ask your loan officer a series of questions to see whether it's the right move for you.

ü      What are my point options?

Have your loan officer make a spreadsheet that map out upfront costs, rates, and payments for loans with 0, 1, and 2 points. Calculate monthly savings difference in options and determine a points-paid/break even point in number of months.

ü      Next, ask yourself, how long do I realistically expect to hold this loan? Do I have any reason that I know I will be selling my home soon or a planned refinance at a particular point? Is this timeframe shorter than the break-even point?

If you plan to hold the loan beyond the "break-even point", it makes sense. If not, no points should be paid.

ü      Can I afford to pay for the points on my purchase loan or out of the proceeds of my refinance?

Here you have your answer.

What gives rise to the dogma that says "never pay upfront points" in the first place? After all, every borrower wants the best deal, don't they? So why cast out what may be a tremendous tool for savings in the borrower's arsenal?

Well, it's a fact that some banks and brokers simply charge a higher premium for their services for the exact same product. Leveling the playing field here is simply a matter of a side-by-side comparison.

Although present laws do not require lenders and brokers to guarantee your actual price until the time of closing, Worldwide Capital Mortgage Corp. always provide his customers with a complete loan application, fee agreement, truth in lending statement and good faith estimate as early as possible in your process.

Borrowers often inquire about other pricing differences that derive from different products (for example variable vs. fixed rates) as well as product options such as taking on pre-payment penalties, balloons and interest only payment options). All are legitimate ways for a borrower or bank to manipulate rates to fit a particular need.

Unfortunately, in most of the cases lack of understanding by both borrowers and loan officers, and misapplications of these methods often interfere with client's ability to use these options in their favor. Just like paying points -- there are times to use any of these options and borrowers should be willing to explore such options with an open mind, but cautious of the ramifications if they are not applied properly. This is why you always have to trust the best company, Worldwide Capital Mortgage Corp, have loan officer with years of experience offering programs that fits all your needs.

For more information you can visit our website at www.worldwidecapitalmortgage.com  or you can call us at Toll Free: 1-866-EZ-FUNDZ (393-8639)