Is it Worth Paying Points On a Mortgage?
When financing a home purchase or refinancing a current home, you have to make a number of decisions. You will have to choose from among a half dozen different mortgage types available to you. Regardless of which type of mortgage you choose, you’ll be faced with another question: should I pay points?
Points, or discount points, are a cash payment that you make to the bank (or your mortgage lender) to get a lower interest rate on your loan. A lower interest rate means a lower monthly payment and savings to you, the homebuyer. The lender also benefits by getting some cash up front, so points can be a win for both parties. However, paying points for a reduction in your interest rate isn’t always worth it. Let’s look at some simple scenarios to answer the question, “Should I pay points on my refinance or new mortgage?”
Let’s assume you are borrowing $250,000. You are quoted an interest rate of 5 percent on a 30-year fixed rate mortgage. This means that every month you’ll be paying $1,342.05 in interest and principle for your mortgage. By the way, you don’t need to be a math wizard to calculate these numbers, your mortgage broker or bank loan officer will provide this information to you, and there are great mortgage calculators online that make doing the math a snap.
Here’s how buying points works: on this same type of loan you might see that paying 1 point lowers the rate to 4.675 percent. Each point equals 1 percent of your total loan amount. So, with our $250,000 loan, 1 point costs $2,500. The math looks like this:
[points] / 100 x [loan amount] = [cost of the discount]
1 / 100 x $250,000 = $2,500.
Also, points may appear on mortgage rate tables a few different ways – as number or a percent, and sometimes under the heading “points” or “discount.” Despite these stylistic differences, the numbers are always the same.
So, we know that to reduce this mortgage interest rate from 5 percent to 4.675 percent will cost $2,500. Now let’s figure out if it’s worth it. The new monthly payment at this lower rate is $1,292.84. This is $49.21 less than the payment for the loan at 5 percent. By spending $2,500 we save nearly $50 a month. Since our 30-year mortgage will last 360 months, that’s a savings of almost $18,000.
It sounds good, saving $18,000 by paying $2,500. But keep this in mind, you only get your $18,000 in savings if you stay in the house for 30 years. With a savings of $49.21 per month it will take you over four years to break even. Here’s the math:
[cost of the discount] / [monthly savings] = [number of months to break even]
$2,500 / $49.21 = 50.8 months (or 4 years and 3 months)
If all these savings sounds great, conventional wisdom actually tells us this is not a great deal. Most experts agree that it is not worth paying points on a mortgage if you won’t break even in less than four years.
This is true for a few reasons. Most likely you won’t be in your house for 30 years, so you never realize the full value of the savings. Second, your cash has value today. In the above scenario, if you spend $2,500, you break even in four years and three months, and double your money in eight years and six months. Could you make better use of this cash? When you pay points, you’ve spent the money, so it can be redeemed no matter how long you’re in the house. For it to make sense, in the above scenario, you’d ideally like to be saving about $60/month not $50.
Deciding whether it is worth paying points on a mortgage can be confusing because it’s difficult to know exactly how long you’ll be in a house and how your financial situation might change over time. If you’re faced with the dilemma of whether you should pay points during a refinance or home purchase, the simple formulas and guideline above can help you through the process.
Getting the house you want at the price you want can be tricky – even in a buyer’s market. Sometimes a home seller just isn’t willing to budge on price. Don’t despair! There are other ways to sweeten the deal and drive it to close in a buyer’s market. Here are seven tips on how to negotiate with a home seller.
Learn as much as you can about the motivations and situation of the home sellers. For instance, if they’re living in the house and they need flexibility around the closing date, you could offer to be flexible on closing if they move on terms. In the case of estate properties, take some time to learn about the heirs – where they live, what kinds of houses they live in and whether or not they are in legal or financial trouble. It sounds creepy, but most of this information is available for free online once you have the names of the home sellers. You can also research obits and marriage documents that are in the public domain. The more you know, the more leverage you have when it comes time to negotiate.
Know What the Property is Worth
Work independently or with your agent to research comparable sales in the immediate area of the home, then make an offer at least 10 percent below what the market says it’s worth. Dig into the details to figure out how the home you want to buy stacks up against comps, and look for ways to communicate the legitimacy of your offer or requests by backing it up with data. For instance, if all comparable sales have a pool, waterfront property or updated kitchens and the house that you want doesn’t, point that out. Use this data to justify your offer or other requests to create value if they won’t budge on price.
Don’t be Afraid to Ask
If there are things that you want or need to feel comfortable with the deal, ask for them. The home seller can always refuse, but if you don’t ask, you don’t know. If you’ve created leverage by learning about the property and the seller’s situation, you can use this information to ask for things, such as repair of items found during the inspection period or appliances that weren’t listed on the original contract for the house. Don’t make assumptions. Even if your realtor balks at the idea, always ask.
Offer a Quick Close
The faster a deal gets done, the more quickly the home seller can cash out their asset and move on with life. Homes that remain on the market or unsold for extended periods of time become costly to sellers (especially if they’re unoccupied) and start to decline in condition. Offering a quick close builds confidence with the seller as it means that there’s less time for things to go sour with the deal. If you’re situation allows for this negotiation tactic, you might be able to either lower your price or get other benefits in exchange.
Make an As-Is Offer and Ask for the Furniture
If you want to make a reasonable but low offer on a property, consider the pros and cons of presenting an “as-is with right to inspect “ offer. The upside is that you can walk away from the deal if the inspection frightens you. The downside is that what you see is what you get, leaky plumbing, termites, mold and all. If you really want a property and are willing to take it as-is, but aren’t really comfortable with the seller’s floor price, ask for the furniture or other non-fixed assets that make the deal more palatable such as a boat or fitness equipment.
Ask the Home Seller to Cover Closing Costs
If you’re apart on price for the home itself, one way to get around the cash crunch and get a deal done is to meet the home seller on price, but ask them to cover all or part of the buyer’s closing costs. Some home sellers might balk, but if they’re able to do this and want to finish the deal with a sale at a particular price point, this technique can work.
Be Willing to Walk Away
Buying a home can be an intensely emotional experience, but at the end of the day it is really just a business transaction. This means you can’t get attached, and you have to be willing to walk away if you’re unable to negotiate with a home seller or if the seller becomes unreasonable. If the seller’s agent senses desperation or over-eagerness on your part, they might interpret that as a signal that they have the upper hand. Silence can be your friend. Hold your cards close and always be willing to walk away.
Investment Funds Crowding Out Local Investors and First-Time Home Buyers
Inventory is already tight at the low-end, and now local investors and first-time home buyers are having to compete with large institutional funds. This is bad news for all of us little guys.
Tom Brady and his supermodel wife, Gisele Bündchen have a few reasons to celebrate. Not only is Tom returning for another Super Bowl bid, but the 22,000 square foot mansion they’ve been building in Los Angeles’ Brentwood district is finally finished
Tom and Gisele bought the land for $11 million back in 2008 and have spent the last few years waiting for their palace to be erected. Their new home has eight bedrooms, a six-car garage, wine cellar, weight room, and a lagoon shaped swimming pool.
Gisele is a United Nations environmental Goodwill Ambassador and as Inhabitat writes, the superstar couple have gotten some flack for their gargantuan home:
Enjoy and comment.
The 30-year fixed-rate mortgage hit another all-time low this week, marking the seventh straight week it has averaged below 4 percent, Freddie Mac reports in its weekly mortgage market survey.
Here’s a closer look at rates for the week ending Jan. 19:
30-year fixed-rate mortgages: averaged 3.88 percent, with an average 0.8 point, a new all-time low and dropping from last week’s previous record of 3.89 percent. A year ago at this time, 30-year rates averaged 4.74 percent.
15-year fixed-rate mortgages: averaged 3.17 percent, with an average 0.8 point, up slightly from last week’s record low of 3.16 percent. Last year at this time, 15-year rates averaged 4.05 percent.
5-year adjustable-rate mortgages: averaged 2.82 percent, with an average 0.7 point, the same as last week’s average. Last year at this time, 5-year ARMs averaged 3.69 percent.
1-year ARMs: averaged 2.74 percent, with an average 0.6 point, dropping from last week’s 2.76 percent average. Last year at this point, the 1-year ARM averaged 3.25 percent.
Source: Freddie Mac
Hire us for any property purchase. We have the facts and details.
Buying a House at Foreclosure Auction is Risky Business
Published: May 18, 2011 By: Marca Judd
You can buy a home at a significant discount at a foreclosure auction, but you’ll face a host of challenges. Don’t get burned; be solutions-ready.
Before attending a foreclosure auction, learn the rules for your area. Several processes are set by individual state and local governments. Image: Comstock Images/Getty Images
If you want to get a good deal at a foreclosure auction, know what you’re buying and how you’ll be expected to pay for it.
If you want to get a good deal at a foreclosure auction, know what you’re buying and how you’ll be expected to pay for it.
Start by understanding the foreclosure auction rules for your area. State and local governments set their own rules for such factors as:
- Bidding process
- Amount of deposit
- Where the auction is held
- Whether the home owners can get their properties back after the sale
You can learn about the process in your area by talking to officials at your county tax department or to a REALTOR®.
Although foreclosure auctions follow local rules, there are some universal challenges you’ll face no matter where you shop for foreclosed properties. Here’s how to solve them.
Solutions to 6 common foreclosure auction challenges
1. Challenge: Getting reliable information about foreclosure sales. Many companies charge fees to send you lists of foreclosures that may not be current, or sell expensive foreclosure-buying “systems” that promise to teach you how to make millions in real estate.
Solution: Most foreclosure sales are still announced in local newspapers. And you can get accurate information about buying foreclosures from reliable book publishers:
Foreclosure Investing For Dummies (For Dummies, 2007)
Keys To Buying Foreclosed and Bargain Homes (Barron’s Educational Series, 2008)
2. Challenge: You can’t get inside the property before the auction to inspect it for structural problems and repairs. Many foreclosure auction properties are in bad shape because the owners couldn’t afford the upkeep. And sometimes angry home owners purposely damage the property to punish the foreclosing lender.
Solution: Walk around the home to check its exterior condition. If it’s vacant, look through the windows. Ask the neighbors what they know about the property. If it was a rental, check the inspection records on file with the local government.
You can safely assume there’s something wrong with any house sold at a foreclosure auction, so cover yourself by bidding no more than 70% of the home’s market value.
3. Challenge: You need to figure out the market value of the house to prepare your bid. Some foreclosure auction announcements include information about the size of the original mortgage. That’s not how much the house is worth or even what the owners owe now. If the current owners bought at the top of the market, their mortgage may be more than the home is worth in today’s market and they could owe even more if there’s a second mortgage on the house.
Solution: Commission your real estate agent to do a broker’s price opinion (BPO) on the home you want to bid on. The BPO will show you comparable sales, telling you what similar, nearby homes that weren’t foreclosure sales have recently sold for.
Bid well below those comparable sales to leave yourself room to pay for repairs and unexpected problems. Ask the agency that runs the auction how to find winning bid amounts from recent auctions. Use that information to guide your current bid, too. A look at local tax and assessment records will tell you more about previous and current auction properties, like square footage and lot size.
4. Challenge: You don’t know if there are liens on the home. Some auctions don’t give you clean title to the property, meaning liens from the federal government or other entities may not be removed during the foreclosure auction process. You’d have to pay off those liens if you won the property.
Solution: Focus your efforts on two or three homes in desirable locations. To find out about any liens, pay a real estate attorney to run a title search on each property and issue a commitment to insure the title after purchase. Ask how the policy treats liens filed between the time of the search and the time you close.
A less-expensive option: Hire an independent title search professional called an abstracter or an online company. Both search options should be under $200, title insurance costs vary by state.
5. Challenge: You have to pay cash and pay it quickly. Most auctions require bidders to come up with the full purchase price in cash within 30 days.
Solution: Don’t count on getting a mortgage that fast. Look for other sources of cash that make financial sense for you.
- Take out a home equity line of credit or do a cash-out refinance.
- Tap retirement accounts, provided it makes sense for you from a tax perspective.
- Work with other investors to fund a partnership to invest in foreclosed homes.
6. Challenge: You’re in love with a house that you’re aware is headed to foreclosure, but you’re afraid to bid on it at the foreclosure auction because you know nothing about the process.
Solution #1: Contact the owners and offer to purchase the home as a short sale. That’s where the bank agrees to let the owners sell for less than what they owe on the mortgage.
Solution #2: You may be able to buy the house after the foreclosure sale. Foreclosure sales are run by a government agency (often the sheriff), which collects the money from the highest bidder and gives it to the bank to pay off the mortgage.
Banks will often bid at the sale to make sure someone doesn’t pay less than the house is worth (translation: not giving the bank enough money to satisfy the mortgage).
If the bank is the high bidder, it’ll take title to the house and put it up for sale. Then, buying the home is just like buying any other house. You can buy an owner’s title insurance policy so you know the house is free of liens; you can get a home inspection to check for needed repairs; and you’ll have plenty of time to line up your financing.
A real estate agent can alert you the day the bank puts the home on the market, so you can submit your purchase offer.
Since the bank pays the real estate agent’s fees, you likely won’t pay more than you’d have bid at the foreclosure auction to outbid the bank, and you’ll avoid most of the risks and unknowns of buying at the auction.