With interest rates going up, lenders will often apply points (also known as discount points) to their interest rates to make them look more attractive to the consumer. But does this make financial sense for your client/yourself? How can you make sure that your client/you are receiving the best care?
Most people don’t know what points are, or how they work so it's important to know they are a fee that a consumer will pay in exchange for a lower interest rate. Each point is equal to 1% of the total loan. For example, a $360,00 loan, one point is equal to $3,600. Upon comparing rates on Bankrate.com, we found a popular online lender was charging 1.75% in points to get to a rate of 3.375% for a $400,000 purchase with 10% down, or a $360,000 loan. Their “par” rate, or the standard rate (no points), was 3.75%, to buy 1.75% in points for this loan would cost $6,300.
The difference between 3.75% and 3.375%, in this case, is about $75/month. To figure out the benefit of purchasing points, you divide $6,300 by 75, which is 84 months or 7 years. That means the buyer won’t see the benefit, or gain, of paying those points for 7 years. Seven years is a long time in the life of a homeowner!
Is it worth it to tie up $6,300 to not see the benefit for 7 years? Did the lender ask if this is how the buyer would like to spend their money? The answer is mostly like No. However, it certainly could be!
Education and open dialogue are the keys here. It is not the lenders’ job to spend a client’s money without their understanding or consent. Ask the lender to show how long it will take before the buyer will receive the benefit of paying points is a good practice. We want our buyers to be educated, informed, and to make sound decisions for their personal finances and homeownership goals. After all, they are trusting us to advise them on one of the biggest financial decisions of their lives.
Reach out to Cyndi Veroneau of Caliber Home Loans…She is always happy to lend a hand!