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  • Discount Points are Back. Should I Buy Down My Interest Rate?

    July 22, 2022 | Joe Metzler
  • Minneapolis, MN: Mortgage interest rates are always changing. With inflation currently at a 40-year high, the FED is aggressively raising the cost of borrowing money to try to flow down inflation.

    The benchmark 30-year fixed mortgage rate peaked recently around +/- 6.00%, but has come down slightly since. 

    The current inflationary market has caused havoc to home buyers, not only in the basic interest rate, but it has also caused serious compression to lenders in how they determine the interest rates they charge home owners.

    See current national average mortgage rates

    What Are Discount Points?

    Discount points, commonly called simply Points in a way for a homeowner to buy down their loans interest rate today, in exchange for some additional costs up-front, paid at closing.

    Each Point represents 1% of the loan amount. For example, a $200,000 loan, one point would equal $2,000 in additional closing costs due at closing.

    Mortgage loan discount points

    Lenders Are Expecting You To Refinance.

    Mortgage lenders make money on the interest you pay over time. With what seems like more statistics than baseball, lenders calculate the estimated time the average person carries a mortgage loan, and how much interest they will collect over that average time. This helps determine their needed margins, and rate of return to cover risk and of course, make a profit.  It also factors into how much a discount point improves the interest rate on any mortgage they offer you.

    Mortgage companies right now are guessing the the 30-year fixed rate will come down enough in the next two years or so, that anyone getting a mortgage today is extremely likely to want to refinance to that future lower interest rate. With estimating you only having the loan for that short period of time, discount points have come back big as a factor in the mortgage market.

    This means the interest rate they are offering you is a little bit inflated compared to normal to improve their anticipated short-term. Their other option is to charge you some discount points to keep their margin when you have the loan for such a small time period.

    Paying Discount Points Is Just Math

    Answering the question of should you pay points comes down to simple math, does the math make sense, and time value of money.

    Part 1: The Math

    I suggest asking your Loan Officer for 3 interest rate and closing cost quotes:

    1. The rate, closing costs, and payment with no points
    2. The rate, closing costs, and payment with one point
    3. The rate, closing costs, and payment with two points

    From here, it is simple math. Divide the additional closing costs by the monthly payment savings. This gives you your breakeven period in the number of payments.

    Part 2: How Long In the Loan

    Let us assume you've calculated your breakeven point is 48 payments (4-years).  Obviously if you are in the loan less than 4-years, buying points makes no sense.  What about if you estimate you'll be in the loan 5-years to 7-years?  How about if you think you'll likely be in the loan more than 10-years?

    Of course if you are in the loan a long time, paying discount points today works out to be good math.

    Keep in mind, as this article is being written, the lenders today are expecting you to refinance in a short timeframe. 

    Part 3: Time value of money

    This final question really comes down to simply this.  Do you even have the additional money available to pay the higher closing costs/  If you don't, well, the answer is easy.  But if you do have the additional money, would that money today be spent of something better?  

    The Bottom Line:

    The bottom line is that answering the question of paying discount points to lower your mortgage loan interest rate is a very individualized answer that only you can make. If you need help, feel free to reach out to the licensed mortgage expects here at Cambria Mortgage at (651) 552-3681.