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Richard Breglia

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When Getting A Mortgage Should I Pay Points Or Not?

10-18-11
Richard Breglia

When I speak to many people purchasing a home I always here what a great rate they got. Most people also boast about not paying any points. But when asked if they know what the rate was if they paid 1 point nobody ever seems to know? Here is a simple way to determine if paying a point or points makes sense and a easy way to calculate it.

I broke it down to a simple 5 step process.

Step 1 - Request at least two rates from your lender. One with a point and one with no points.

Step 2 - Determine the monthly mortgage payment for both rates

Step 3 - Calculate the difference in monthly payments for the two rates

Step 4 - Calculate the cost of 1 point (1% of the loan size)

Step 5 - Calculate the break even point (how many months will it take to pay off the point)

You simply divide the cost of the point by the difference in the monthly payments

Example:

Loan amount: $200,000 - 30 year fixed, fully amortized principal & interest

Step 1
Quoted Rate 1 - 4.25% (no points)
Quoted Rate 2 - 3.75% (1 point)

Step 2
Quoted Rate 1 (no points) monthly payment = $983.88
Quoted Rate 2 (1 point) monthly payment = $926.23

Step 3
Difference in monthly payment = $57.65

Step 4
Cost of 1 point (1% x $200,000) = $2,000

Step 5
Calculate the break even point ($2,000 / $57.65) = 34.69 months

In this example it will take almost 35 months to pay back the point. After that you will realize a savings of $57.65 per month, $691.80 per year, and $18,754 for the life of the loan.

Figure out how long you plan on carrying the mortgage and pick the loan program that works best for your goals. Data shows that most homeowners move every 5 -7 years.

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Realtors Were Saying Nows The Time To Buy? They were Right!

10-15-11
Richard Breglia
Super conforming loan amounts in Fairfield County just took a huge hit. Prior to Oct 1st you could borrow up to $708,750 and put as little as 3.5% down. As of Oct 1st you can only borrow $575,000
with 3.5% down. What a huge difference for FHA borrowers.

Now what about the people not interested in FHA loans you might ask? If you need a loan for more then $575,000 your loan will once again be classified as a Jumbo loan. The bad thing about Jumbo loans are the higher interest rates that come with them in addition to the higher down payments and more restricted guidelines which I won't even address. These loans will now be backed by private investors and not by Freddie Mac and Fannie Mae. The same loan amount will now come with a considerably higher interest rate thus higher mortgage payment. But for those that have been waiting on the sidelines, how much extra money will it cost them out of pocket to qualify for the new lower conforming loan amount of $575,000? Let's take a look.

example:

Prior to Oct 1st
30 year fixed principal & interest
Purchase Price - $880,000
20% down = $176,000
Loan amount - $704,000
This would qualify for a super conforming loan with a lower interest rate.

Oct 1st - Present
30 year fixed principal & interest
Purchase Price - $880,000
35% down - $308,000
Loan amount - $572,000

For buyers that can come up with the extra out of pocket cash needed to get the loan amount below the $575,000 guideline will not be hurt. For those that can not, will need to take out a Jumbo Loan and pay a much higher interest rate and mortgage payment for the exact same loan amount.

Let me give you an example: 30 year fixed principal & interest
As a reference lets use 1% as the bench mark for the difference between a conforming and Jumbo loan interest rate. Let's use the same loan amount $704,000.

1. $3,361.00 monthly principal & interest on $704,000 (conforming)
2. $3,779.22 monthly principal & interest on $704,000 (jumbo)

$418.22 is the difference in monthly payment, $5,018.64 per year.

Buyers waiting on on the sidelines speculating that the prices are still to high and will come down will take a hard hit if they are still in the market to purchase. In the meantime they have rented and likely covered the homeowners principal, interest, and taxes. These sideliners will be adversely affected by the following if they can't come up with the extra out of pocket cash required to qualify for the new lower loan amount.

1. Increase of $418.22 a month on their future monthly loan payment
2. Loss of all the tax deductions associated with deducting their interest payments from their taxes for as long as they rent.

I don't think the market will or has depreciated more then the sum of these factors. Time will ultimately tell.

The saying " If you snooze you loose" is fitting for what has occured Oct 1st - present. The sad thing is most of these potential buyers were not aware of these changes or I believe more would have pulled the trigger!

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