Do you recommend paying discount points to lower your interest rate on a loan? Why?

Asked by Sue Archer Reynolds, Palm Harbor, FL Sun Aug 24, 2008

I would appreciate lender opinions on the advantage and disadvantage to a client in paying down their interest rate by paying a discount rate. It appears to me that it would be more advantageous for my client to keep that money and pay it directly to the principal over time.

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Nato Ruiz, Agent, Sacramento, CA
Sun Aug 24, 2008
Hi Sue. That is an excellent question. There are potentially HUGE advantages to paying down the interest rate and I would highly recommend it. There are several types of Buy Downs available to match the buyer's needs, 2-1 Buy Down, 3-1, Permanent Buy Down. When the rate is bought down, several things happen: Obviously, the rate is lower, payments are also lower and the income needed to qualify for a loan is also lower. For you, as a realtor, this opens up a bigger pool of people that can qualify to make a purchase who otherwise may not have qualified at the higher rate. What I would then recommend to the buyer is that they use the difference (or part of it) of their lower payments to either pay down the principal, invest it in an interest bearing account or both. This is going to help the buyer pay off their property faster and also build wealth. I would recommend, especially in this market, to get the seller to pay for the buyer's rate Buy Down, instead of lowering the price of the home. I will send you some information separately so you can see the huge, positive impact this has for seller, buyer, the market, realtors and all parties involved.

P.S. A rate Buy Down has NOTHING to do with a lender or mortgage professional making more money. Some people are just badly missinformed.

-Nato Ruiz
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Scott Godzyk, Agent, Manchester, NH
Sun Aug 24, 2008
Paying dscount points will lower your interest rate but also increases the mortgage brokers commission. They can lower your rate just byasking. they have a chart that tells them at this rate i will make this amount of money. and if i charge you these amount of points your interest rate will be this amount. If you are purchasing ahome for a long term rather than thinking you will live there for 5 years or less, than you will start to see a return on your money in 5 to 7 years. If you have good to great credit you can lower your rate by having companies compete for your business. If your credit score is only medium or lower you will not have this pull with todays credit crunch. Your money is always worth more today than tomorrow and can be better spent than paying points. Good luck with your sale Sue.
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