As the media talks about rising mortgage rates, some house hunters get nervous about the cost of buying a home. This certainly seems logical, especially for anyone who’s only been adulting for 20 years or less and has always lived in a climate of low interest rates.
While some experts are predicting that mortgage rates may hit 5% by the end of the year, they’re still a bargain compared to the early 1980s when families were paying 18% interest.
Even though 5% is still is a “good” interest rate, savvy homebuyers want to get the best deal possible—and you can help them by introducing them to buying points. This technique lets them reduce the interest rate on their home loan, which is helpful if rates are higher than they budgeted for.
Pay Now. Save Later.
Also referred to as mortgage points, discount points or a buydown, buying points makes it possible for your client to have a lower interest rate on their mortgage, which has a long-term effect on the total interest paid over the course of the loan. As a refresher, here’s how it works:
Each point costs 1% of the principal and is due when the loan closes. For example, if your client needs to borrow $150,000, one point will cost $1,500, two points will cost $3,000, etc. The amount of the rate reduction varies based on the type of loan, the lender and the current interest rate environment. It’s smart to keep the following things in mind when recommending that a client consider a buydown:
• Borrowers can actually buy fractions of points if full points don’t make sense—1.5, 2.25, etc.
• Stay in touch with a lender to find out how much points could potentially reduce your client’s rate.
• Consider negotiating a deal in which the seller pays points to reduce your customer’s interest rate. This can be a great bargaining tool that helps you close that deal!
• A Stearns mortgage originator can help your clients do a break-even analysis to see if buying points will provide a benefit. Generally, if they plan to move again in five years or less, buying points won’t save them much (if any) money.*
Is This The Right Approach?
You might be wondering if this strategy makes sense for your client’s home purchase. Of course, everyone’s financial situation and life goals are different, but here are some instances in which it’s a good idea to consider a buydown:
• Your client has enough cash to buy points up front. However, in some cases, they’re better off using that extra money toward a larger down payment.
• As explained above, a buydown can incentivize a house hunter to take action if the seller buys the points.
• Having smaller monthly payments is important. This might be due to plans to start a family, start a business, purchase new cars regularly, fund college tuition, pay student loans, travel often, contribute a higher level to a 401(k), etc.
• They’re preparing to retire and would like to have manageable payments to accommodate their new lifestyle, but they can afford to buy points now.
Ultimately, choosing to buy—or not buy—points comes down to individual goals, personal preferences and the buyer’s financial situation. A Stearns loan originator can help your client make the choice that’s right for them—which means a happy client for you!*
One final note: In some cases, points may be deductible on your tax returns. However, with the new tax law and increased standard deductions, fewer people are likely to itemize which is a prerequisite for writing off mortgage interest and points.*
* This blog post is being provided for the purpose of general education, but should not be construed as legal, financial or tax advice. Please consult the appropriate advisor(s) for information that fits your individual needs.
- By Stephanie Clark ,
Jan 28, 2019