To pay points or not to pay points, that is the question – so said Hamlet when he bought his first house. :)
(He only contemplated “to be or not to be” after he found out he paid two points for a horrible ARM with a 5 year prepay penalty.)
Anyway – Hamlet probably should not have paid points and I explain why below.
Discount Fees, Points and Origination Fees are used interchangeably, and they usually refer to the fees paid to “buy down” an interest rate.
One point = 1% of the loan amount.
WHY WE DON’T RECOMMEND POINTS
1. Too Little Bang for the Buck. Borrowers typically only get about a 1/4 percent improvement in rate for paying a point. Hence, it takes about four years to recoup that point with interest savings. It takes even longer if you focus only on the savings from the resulting lower mortgage payment. Borrowers often end up refinancing before they recoup their point or points, as discussed below.
2. Changing Rates, Changing Equity and Life Events: No matter how long people expect to keep their loans, we are always amazed by how soon they refinance for a variety of reasons. People refinance because:
- A. rates fall sooner than expected (like what has happened over the last few weeks);
- B. the equity in their home increases and they want cash out or they want to eliminate Mortgage Insurance; and
- C. life events such as job changes or family size changes require different housing needs.
Hamlet, for example, discovered he no longer needed his five-bedroom Copenhagen townhome after all his family, friends and occasional lover died.
3. Recession in the Future: Many economists and hedge fund managers (even more telling b/c they have skin in the game) are predicting a recession after 2020. And when recessions hit, the Fed lowers rates. This is partially why the Fed is increasing rates now in fact – so they have some “ammo” (lower rates) to employ to counter a future recession. In any case, when rates fall during a recession, most borrowers who have obtained loans in recent years (even those who paid points for lower rates) will likely be able to refinance at no cost.
4. Unscrupulous Lenders. Many lenders convince borrowers to pay points for rates that they probably could have obtained at “no points” at another lender. These lenders convince borrowers that they are paying “discount points” to buy down the rate when the borrowers are really just padding the lenders’ overall commission.
5. Cash Is King: One more reason not to pay points is that it requires more cash to close, and for many of our borrowers cash is all too tight in the first place. In addition, it is simply advisable to remain more liquid for a variety of reasons – home improvements, investments, unexpected expenses, etc.
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167