How do mortgage points work?Your ability to understand mortgage points can save your clients thousands of dollars by Tony Davis on May 12, 2015 Shopping for a mortgage can be overwhelming and sometimes utterly confusing. Points, no points, closing costs, rebate credit — the options seem endless. Trying to compare rates from one lender to another? It’s not as easy as it sounds. Rates change daily, so unless you are getting updated quotes from all lender options on the same day, you’re not comparing apples to apples.
You see, comparing mortgage lenders is kind of like driving down the road trying to find a gas station. Today, BP might be one cent cheaper than the Shell station across the street. Tomorrow, the Shell station might drop its price to meet a sales quota and take the most competitive spot.
For the most part mortgage companies offer the same products as one another, with the same guidelines. Conventional loans are underwritten to Fannie and Freddie’s requirements, Federal Housing Administration loans to Ginnie’s, and VA loans to the standards of the Department of Veterans Affairs. It should be easy to compare price, right?
To start with, it is essential to understand how discount points and rebate credit work. You will use this knowledge combined with an estimate of how long you will keep this mortgage to help make an educated decision on how to structure a loan. You will also need to be able to tell the difference between a lender specific fee from a third party real estate fee.
For example, let’s take an imaginary home buyer named Ted. Ted is buying his first home for $250,000 and is putting 20 percent down. His mortgage amount will be $200,000, and he wants a 30-year fixed loan. Ted just got married and plans to have children in the next few years. He expects to sell this house in the next five years, and then buy a larger home when his family grows.
Ted has obtained the following quotes from three different lenders:
1. 4 percent fixed with 0 points; $955 monthly payment
2. 3.75 percent fixed with 1.00 point; $926 monthly payment
3. 4.375 percent fixed with -2.00 points of rebate credit; $998 monthly payment
Let’s dig into the numbers a little bit to figure out which option is in Ted’s best interest.
A zero points loan does not mean Ted will not pay any closing costs. It just means he is not buying the rate down. A zero points loan is a loan priced at the lender’s market or par rate. If Ted takes the zero points loan, his monthly payment will be $955.
In the next instance, 1.00 point is equal to a fee of 1 percent of the loan amount. So for the second option, Ted would pay an extra $2,000 (1 percent of $200,000) compared to option one at par to obtain a lower than market rate of 3.75 percent. If he does this, his monthly payment will be $926.
Rebate credit is the opposite of paying points. At -2.00 points of rebate credit means the lender is offering up to 2 percent of the $200,000 loan amount ($4,000) at closing to offset Ted’s closing costs. In exchange, Ted would have a higher than market rate. If Ted goes with option three, his monthly payment would be $998. However, his closing costs would be $4,000 less.
So what should Ted do?
If Ted pays 1.00 point to buy the rate down to 3.75 percent, his monthly payment would be $29 less than the zero points loan, but his closing costs would be $2,000 higher. If you divide $29 into $2,000, you’ll see it would take him 68.96 months (5.74 years) to get his upfront cost back because he’d only save $29 each month on his payment. If he sells his house or refinances in less than 5.74 years, he would lose money paying 1 point to take a 3.75 percent interest rate.
If Ted takes the -2.00 points of rebate credit and accepts a higher than market rate of 4.375 percent, his payment would be $43 higher than the zero points loan. His closing costs would be $4,000 less. If you divide $43 into $4,000, you’ll see it would take him 93 months (7.75 years) for the higher rate loan to cost him more money than the zero points loan. If he sells his house in five years, the higher rate would have cost him $2,580 in additional interest, but since he received $4,000 up front via rebate credit, he would actually walk away with a $1,420 profit. So in this hypothetical example, the higher rate makes the most sense for the borrower.
Now that you know understand the basics of how mortgage points and rebate credit work, you need to be able to compare closing costs from one lender to another. Ask your lender to break down exactly what fees his or her institution charges to make the loan. Exclude prepaid items such as homeowners insurance, property taxes, title charges, recording fees, prepaid interest and attorney fees. These fees will cost you the same regardless of the lender you select.
Now you can compare apples to apples.
Tony Davis is a Senior Loan Officer in Atlanta, Georgia. He specializes in providing purchase and refinance mortgages to homebuyers and existing home owners, and serves as a consultant for real estate agents.
Construction Notice: Pile Installation 43rd Pl - April 24, 2015SummaryWalsh-Shea Corridor Constructors (WSCC) will continue installing soldier piles across 43rd Pl at Crenshaw Bl. This activity requires a full closure of 43rd Pl at Crenshaw Bl. The closure will continue for three weeks, through May 10, 2015.
NoteworthyEat, Shop, Play Crenshaw
Take the Pledge at www.metro.net/crenshaw
EssentialsWHAT: Pile Installation
WHEN: Continuing through May 10, 2015.
WHERE: 43rd Pl at Crenshaw Bl
DURATION: 3 weeks
What to ExpectFull closure of 43rd Pl at Crenshaw Bl.
I recently completed a 21 day detox diet and I feel great! I wasn't sure if I was going to be able to live without coffee, adult beverages, sugar, bread, pasta and meat, but I did it! I only drank distilled water and ate only vegetables, grains and fruit. I am now re-energized, focused and ready to hit the ground running. This means that I will be able to increase the exceptional customer service I provide my former, current and new real estate clients.
Our homes also need a reset. My wife and I recently replaced the roof on our home. I wasn't leaking, but it had been over 15 years since anything had been done to it. We also decided to replace the gutters and do a little handyman work to the interior and exterior.
As these updates near completion our home looks and feels like a new residence and as a real estate professional, I know we have definitely added curb appeal and value.
You don't have to take on expensive repairs like a new roof to add value, a can of paint can dramatically change the look and feel of your home at a fraction of the cost.
Whatever "reset" you decide to do (home or body) just know that the end results will always be positive and add value to your life.
I have always "tried" to do something to remain fit throughout my life. In high school I played basketball and ran track. In college I.....well I didn't do that much to stay in shape, but I really enjoyed my college years. Upon entering the working world, I purchased several fitness club memberships, never finding time to actually go. Beacause of my time constraints I decided to start running and really enjoyed it, but my knees felt otherwise. So after two trips to physical therapy, I bought a road bike and began cycling in 2009 as a way to save my 41 year old knees. Two years later......I am hooked. When I'm not working clients or spending time with my family, you will probably find me riding somewhere in the Metro Los Angeles area. I enjoy the balance between endurance and strength cycling provides, and the fact that I am able to exercise outdoors, not inside of a fitness club. Currently, I have no plans to race locally, but have found a group of like-minded guys to ride with on the weekends. So if you ever see me out on my bike, please say hi!
With interests rates nearing a 50 year low and many bank-owned and short lisitngs in our area for sale, it has become a buyer's market. When I meet with clients regarding the sale of their home I am always asked about listing their home for a price above the recent comparables...... And this is what I say.
In real estate terms, market value is the price at which a particular house, in its current condition, should sell within 30 to 90 days. If the price of your home is too high, this could cause several things:
It Limits buyers-Potential buyers may not view your home because it appears to be out of their buying range.
Limits showings-Other salespeople may be more reluctant to view your home.
Used as leverage-Other Realtors may use this home to drive the sale of other homes that are better-priced.
Extended stay on the market-When a home is on the market too long, it may be perceived as defective. Buyers
may wonder, “what’s wrong,” or “why hasn’t this sold?”
Lower price- An overpriced home, still on the market beyond the average selling time, could lead to a lower selling price. To sell it, you will have to reduce the price, sometimes several times. In the end, you’ll probably get less than if it had been properly priced in the first place.
Wasted time and energy- A bank appraisal is most often required to finance a home.
For those of you who don't know, I am now a part of the Rodeo Realty family. I'm sure you've noticed all of the Rodeo Realty logos throughout my new site. I am very excited about the move and the opportunity I have to grow my business tenfold. My office is at 9200 Sunset Blvd Suite 200 LA CA 90069 and I welcome any and all lunch opportunities. I will probably get around to putting up the family photos and the decorative prints next week. This week has been spent learning the business philosophy of Rodeo Realty, meeting my new colleagues and selling real estate!!