Mortgage rates have risen in recent weeks, but there are still ways in which you can help your clients to get a lower rate. All they have to do is “buy the rate down”, a process that’s also known as “paying points”. But anyone considering doing so should decide carefully if it’s the most sensible option for them.
Julian Hebron, executive vice president of sales and marketing at RPM Mortgage, told CNBC News in a recent interview that “buying the rate down” refers to paying an additional amount atop of standard loan fees like appraisals, credit reports and underwriting costs in order to lock in a lower mortgage rate. It means spending more cash at closing, but could save buyers in the long run.
It works like this: A point is 1 percent of the amount of a loan. So for a $200,000 mortgage, a borrower paying 1 point would bring $2,000 more to the table.
“If you were getting a 30-year fixed loan of $325,000, you might get two options with and without points,” Hebron explained. “Today, the option with zero points might show the rate as 4.25 percent, and the option with 1 percent in points — equal to $3,250 — might show the rate as 4 percent. Paying $3,250 at closing to lower your rate by .25 percent lowers your payment $42 per month and lowers your interest cost $68 per month.”
It sounds like a great option for anyone with the cash to take advantage of it, but some experts say they still need to be cautious. Buyers should consider how long they plan to live in the home and what their total savings would be over the course of the mortgage, said Matt Weaver, vice president of sales at Finance of America Mortgage.
In order to work it all out, Weaver advises buyers to perform a few simple calculations:
“We can calculate this figure by taking the dollar value of the buy-down and dividing it by the monthly savings from the lower interest rate, then dividing that figure by 12 months,” Weaver said. “So as an example, let’s say our prospective home buyer will need to pay $2,000 in buy-down to generate $30.00/month in savings. If we divide $2,000 by $30, we would conclude it would take 66.7 months, or 5.5 years, to recoup the cost of the buy-down. Now you can ask yourself, ‘Do I reasonably foresee myself staying in this home for at least 5.5 years?'”