The Myths about ZERO point mortgages instead of paying points upfront……

I have been doing this for 14 1/2 years now. When I first got into this industry, sure, I was green….brand new. Sure, I had classes in High School and College in regards to financing, economics, managing your money, your typical math classes, and even some accounting classes. But what got me were the lawyers and the accountants that told their clients not to do mortgages with points associated to them. Or the typical family member and your next-door neighbor that got this great deal with zero points and that this was the way to go. Even the talk radio shows that might have been talking about one specific thing in regards to points and zero points, but that you came into the middle of the program. So you might have heard differently.

One of my first questions when speaking to a client, refinancing or purchasing, is what their goals are for the near future and their long-term goals. Now, many of us don’t have these so-called crystal balls that many claim to have. Things can happen at any time. But I have a lot of passion in what I do and I care what I do, helping those clients to achieve their dreams. And by giving them options in what kinds of programs there are and the costs behind these programs, I can help them achieve this dream and their goals.

 

This sometimes can be simple math and not even the calculators online can tell you if you should refinance or even buy a house. These calculators are a formula made up by someone’s calculated guesses and certain factors included. I am not looking for the typical answers of; “I want Zero points” and “those no cost loans”. Just because the client says that they want this type of loan, doesn’t mean that it fits their needs.

 

I am going to use an example in regards to someone purchasing a $200,000 house with no money down. Let’s keep the example simple by stating the only closings costs will be zero points or with 2 points. And for those that might not be putting more than 20% down, please read my previous blog: PMI (Private Mortgage Insurance); why you need it and the different types of PMI

 

             EXAMPLE

                                              ZERO POINTS                           2 POINTS

             Loan Amount               $200,000                               $200,000

 

             Int. Rate                       6.375%                                  5.750%

 

             Cost of Points                 $0.00                                   $4,000

 

             Monthly                      $1,247.73                              $1,167.14      

             Payment   P & I                   

 

Part 1

At this point, the difference of payment is $80.59. Let’s assume that you are in a 25% tax bracket for income tax purposes. You need to consult your accountant on the different tax deductions when it comes to purchasing and refinancing. Keep in mind that this is a purchase transaction. You can write off the full amount within your tax bracket as opposed to when refinancing. So your calculated savings will be $1,000 next year. Now your cost of the points is $3,000. Keep in mind that you are saving $80.59 a month. When dividing this into the cost of $3,000, it tells you that it would take you 37.2 months to recoup this money. Your break-even point now becomes 3.2 years.

 

Part 2

Here is where so many lenders fail in educating the average client or where the client doesn’t see the true savings. You also have the amortization of the loan.

If you kept the loan for 5 years at 6.375%, your principal balance would be $186,950.49. If you were paying 5.75% for those same 5 years, your principal balance would be $185,524.37. This is a difference of $1,426.12 savings by paying 2 pts to get your interest rate lower.

In closing:

Again, these are examples and not including other lender costs or even mortgage insurance depending on your down payment. This comparison is just for informational purposes in explaining how points and no points work. And yes, you would need that extra money to even buy the rate down. This doesn’t always apply to everyone because of the money issues. And it also comes down to your monthly and yearly goals, may it be short term or long term. But this is a good dissection of what your money can do for you and how it can work for you. And one of the old MYTHS of points is that the lender is making more money. This is not true at all, as long as your lender is comparing true apples to apples.

***These rates and points are just an example. It all depends on your income and credit qualifications in order to get these rates.***

 

For more Info:  Jeff Belonger   jbelonger@nationalfuturemortgage.com