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Why Borrowers Should Not Pay Points to Buy Down Interest Rates

Why Borrowers Should Not Pay Points to Buy Down Interest Rates

EVERYONE WHO PAID POINTS IN 2009 WASTED THEIR MONEY

In 2009, when rates fell below 5% we refinanced our entire database and many borrowers wanted to pay points to buy down their rate.

As a reminder – a “point” is 1% of the loan amount.

Our borrowers wanted to pay points b/c: (1) they thought rates had hit an all-time low and they wanted the lowest possible rate; and (2) a point could buy the rate down as much as 1/2 percent (much more than usual) at that time.

BUT – within a year rates had fallen significantly again and every one of those points-paying borrowers ended up refinancing again.

Hence, the points they paid were a total waste of money. Ever since that experience, we have been advising against paying points.

With so many pundits predicting a recession and lower rates in the near future, I want to again remind everyone why we don’t like “points.”

WHY WE DON’T RECOMMEND POINTS

  • Too Little Bang for the Buck. In the current market, 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. Borrowers often end up refinancing before they recoup their points, as discussed above and below.
  • 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:
    • Rates fall sooner than expected (like what has happened over the last few months);
    • The equity in their home increases and they want cash out or they want to eliminate Mortgage Insurance; and
    • Life events such as job changes or family size changes require different housing needs.
  • Recession in the Future: Many economists and pundits of all stripes and are again predicting a recession, as mentioned above. And when recessions hit, the Fed lowers rates. Rates usually fall significantly during recessions, so most borrowers are able to refinance into a lower rate at no cost, even if they paid points for their current rate.
  • 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.
  • 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.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 310167