Financing in Roseville>Question Details

May, Home Buyer in Sacramento, CA

Financing options: I have an option to finance with 0 points with a higher interest rate OR pay points and

Asked by May, Sacramento, CA Sat Mar 22, 2008

get a lower interest rate (30 year fixed). I heard that the points paid is tax deductible. Should I pay points up front to have a lower interest rate? The banker is saying that it is not worth paying points up front especially if I'm planning to move in 5 years. But who can predict that? Any advice? I'm buying in Roseville, CA, if that makes any difference.

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Hello May. I believe it's never a good idea to do something just because you get a tax deduction as you only recover a fraction of the actual cost. If you have a $200,000 loan at 6% (interest only to make things easier) and you'd have to pay 2 points up front to get a 5% interest rate, you'll have to pay $4,000 up front to save $2,000 a year in interest, which means that you'd break even in about two years (I am not taking tax benefits of paying more interest or receiving a tax deduction for the points or inflation into consideration).

At this point, it sounds like you don't know how many points you'd have to pay to buy down the rate to where you want it to be since you have not yet locked in the rate. Rates change daily and your loan agent can't tell you today what the rates will be on the day you lock in your rate.

Just out of curiosity, have you asked your loan agent how much he/she will earn for getting you the loan? I am asking you this because most home buyers never ask that question and I think it's partially because they don't care if and how the agent gets paid and, most importantly, because they don't understand the relationship between the broker compensation and their interest rate. The loan agent either gets paid by the lender or you or both the lender and you.

Let's say you want to pay no more than 6% for your loan and your agent wants to earn an amount equivalent to 2% of the loan. Let's further assume that the lender offers a 2% rebate to the broker for a 6.5% interest rate loan, a 1% rebate for a 6% interest rate loan and no rebate for a 5.5% interest rate on the day you lock your rate. You have several options. You can take the 6.5% loan and pay no points because the lender pays all of the 2% that the loan agents wants to earn, you can take the 6% loan and pay 1 point to the loan agent, or you can choose the 5.5% loan and pay 2 points to the loan agent. It is best to negotiate the broker compensation with your loan agent in advance. You should not wait until you get to the signing table to find out how much your loan agent gets paid because then it's too late to negotiate a lower interest rate. I think you might be unhappy to find out that you are paying 2 points to the loan agent who also gets two points from the lender just because the loan agent wants to make 4% on the loan. It is ok to negotiate the broker compensation up front. How much is reasonable will depend on the loan amount and how much work is involved in getting your loan. If your credit is good, the amount of work involved will most likely be a lot less than if your credit history is challenged.

Having said all of this, I would like to point out that you could also ask the seller to give you a credit towards closing costs and you can then use the credit (all or part of it) to buy down the interest rate. Many lenders will allow up to 3% of the purchase price as buyer credits. You should also ask your loan agent about the 2/1 and 3/2/1 buy down programs (you get a fixed rate loan, but the seller pays to buy down the interest rate for the first 2-3 years).

Best of luck to you with your home purchase.
2 votes Thank Flag Link Sat Mar 22, 2008
Ute Ferdig -…, Real Estate Pro in New Castle, DE
MVP'08
Contact
The banker is right. Not only is it a good idea to avoid paying "points" if you are likely to move in 5 years, it is also a better idea to take a 5 /25 7/23 or 10/20 If one of those programs results in a lower interest rate during the initial 5 7 or 10 year fixed period.

People that can predict they will ( probably )stay put are people whose family sizes are not growing or shrinking, whose jobs and income are extremely secure, with little chance of a transfer.

You cannot predict with certainty, but you can make a guess as to whether you see yourself as a permanent settler or you see yourself as a mover and a shaker. Er, well a mover anyway.

Let's say you've got a great job with the City of Roseville, something that won't be eliminated if there are budget cuts. You might be in it for the long haul.

On the other hand, say you are a web designer with an upstart web3.0 company. This year you are in Roseville, next year you could be in San Francisco or Manhattan.

The point is: the payback for taking a 30 year fixed rate and paying points for a lower interest rate is generally less for financial benefits than emotional benefits.. When you take the 30 year fixed loan:
You
1. Congratulate yourself for taking the safest loan (even if it is more expensive in the short term and the medium term, and the medium long term)
2. You do come out ahead if you never sell, refinance or prepay the loan in the first 10 or 12 years.
(The really long term)
3. You eliminate worry over worst case scenarios for interest rate fluctuations in the distant future.

Roseville is a terrific little city. The only reason that i can think of, that could make me to move away would be a job transfer.
2 votes Thank Flag Link Sat Mar 22, 2008
I totally agree Jim! Our 5/1 ARMS for example are running today at 3.375% today at par (meaning no points & no lender credit); 7/1 ARMS are at 3.50% at par.
Flag Tue Apr 10, 2012
Jim Walker, Real Estate Pro in Carmichael, CA
MVP'08
Contact
IRS form 530 gives information on the tax deductibility of points. It changes a bit every year. Link below. Good luck! And if you could use a referral for an excellent agent in Sacramentto, May, let me know. I have a good friend who has been in the business for many years.
0 votes Thank Flag Link Sun Oct 3, 2010
Yes, I believe so....the lender is also paying the closing cost so we are just responsible for paying points.
0 votes Thank Flag Link Mon Mar 24, 2008
That was for Lender paid mortgage insurance... Correct???
0 votes Thank Flag Link Sun Mar 23, 2008
Personally I would take the 6.375 with 1,500 in fees, you have to keep in mind that there are closing costs that add up fast...

This is what I typically estimate:
Title/Escrow
24 Month Chain of Title Guaranteed $35.00
Credit Report Guaranteed $30.50
Appraisal Estimated $375.00
Closing Fee Estimated $495.00
Courier Fee Estimated $35.00
Tax Certificate Estimated $35.00
Title Insurance (Lender's Policy) Estimated $1,488.00
Recording: 150
Doc Transfer Tax: 1.10 per 1K = 440
Prepaid interest, Taxes, Insurance

The rates seem a little steep to me (about 1/8-1/2 higher than what I have for last rate change Friday):

Loan Amount: $400,000.00 State: CA
Purchase Price: $445,000.00 Property Type: SINGLE
Interest Rate: 5.875% Property Use: HOME
APR: 5.987% Loan Purpose: Purchase
Product: 30 Year Fixed Documentation: FULL
Guaranteed Lender Fees $4,814.00

Loan Amount: $400,000.00 State: CA
Purchase Price: $445,000.00 Property Type: SINGLE
Interest Rate: 6.375% Property Use: HOME
APR: 6.375% Loan Purpose: Purchase
Product: 30 Year Fixed Documentation: FULL
Credit Towards Closing Costs ($414.00)

Loan Amount: $400,000.00 State: CA
Purchase Price: $445,000.00 Property Type: SINGLE
Interest Rate: 6.000% Property Use: HOME
APR: 6.089% Loan Purpose: Purchase
Product: 30 Year Fixed Documentation: FULL
Guaranteed Lender Fees $3,798.00

Happy Easter
0 votes Thank Flag Link Sun Mar 23, 2008
Thanks for the helpful responses. So here are my financing options for a 400,000 loan. We decided to do an 80/10/10.

RATES POINTS COSTS PAYMENTS

6.50% -.028 (credit of 112.00) 2,528.27

6.375% .388 (1,552.00) 2,495.48

6.25% .831 (3,324.00) 2,462.86

6.125% 1.194 (4,776.00) 2,430.44

6.00% 1.621 (6,484.00) 2,398.20

As mentioned earlier, we thought going with lower interest rate would be better. But it sounds like that's not the case. We think we plan to be there at least 5 years...longer, not sure? Does this change your advice or thoughts?
0 votes Thank Flag Link Sun Mar 23, 2008
Jim and Ute have great points. Fortunately 30 year fixed rates are the about same as 10/7/5/3's right now. It typically costs 1 point to bring the rate down a quarter point. If you are unsure if you will be staying in the house for over 5 years, I would typically suggest not paying any points, depending on the loan amount it may be a safe investment though. If your loan amount is 172K then your going to pay 1,720 to get the rate down a quarter, if the loan amount is 500K then your paying 5,000. If you had some more info like loan amount, purchase price and program type (fha, full doc, stated) that would help out a lot.

This link may be able to help you out a little: http://www.mtgprofessor.com/mpcalculators/FRMBreakEvenCalcul…
0 votes Thank Flag Link Sun Mar 23, 2008
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