Should I pay points on a Mortgage?

all right all right all right matt the mortgage guy back for another rendition of common questions i'm getting in mortgage that i would like to share with you because i think they may be helpful the million-dollar question should i be paying points [Music] and i'm going to get into detail in this video on why there's so many different variables to consider sometimes you should sometimes you shouldn't depending on not only the loan type the loan product the rate sheet but you and your future plans your goals all that other stuff so before i get into it please if you would be so kind smash the like button the youtube algorithm whatever the heck that is something good happens right so like subscribe share this with whoever you think might benefit and before we get into it i know some people probably want an explanation of what do you mean by points and so if you don't know what points are here's the easiest way to describe it i like to keep things as simple as possible when you get a mortgage you have the option to pay points which basically means pay money up front to get a lower interest rate so you're going to put more money out of pocket right now today pay the lender to get a lower interest rate which is going to give you a lower monthly payment on all your future mortgage payments you either do one or the other you either pay less today and have a higher interest rate or you pay more today and have a lower interest rate that's just how it works no matter what people try to tell you and so here's what i want to do i want to go through what a rate sheet looks like and hopefully you know more than just me explaining it me showing it and showing the numbers if you're like me and a visual person this is going to do it more justice than just my lips are moving all right so without further ado four hundred thousand dollar loan on a purchase and i think i have the purchase price at 550ish five and a quarter something like that so we're 70 to 75 ltv primary purchase um this is not intended to be an offer to lend so just get that out of the way nmls number one zero eight eight nine nine three this is just for educational purposes just an example okay so here's what people don't understand when i price your scenario and i say all right mr joe buyer you've got a 760 credit score you're putting 25 down and you're purchasing a home in this zip code here's the rate sheet it's not just like what rate do i get when you draw a rate out of a hat it's like oh cool i got me a 2.625 that's not exactly how it works based on your credit score your down payment property type and some other factors a rate sheet pops out and that rate sheet i didn't even give you the whole shebang it's even bigger than this but this one for my example two to five to three to five so when somebody calls good old math and mortgage guy and says what's your rate i go whatever you want this goes up to two percent on a 30 or i'm sorry on a on a 30-year fixed uh which you would never want you never want to pay as much as it costs to go to that rate so let me explain that two and a quarter on the scenario i'm describing cost 3.2 points one point is one percent of the loan amount so every one point on this four hundred thousand dollar loan equals four thousand dollars that you pay up front to buy down the interest rate so three and two points i did a lot of rounding here so if the math doesn't exactly align just know that i looked at the points i guesstimated there i looked at the cost i guesstimated there i rounded close enough for government work 12 800 up front if you really wanted to in this scenario you pay an extra 12 800 at closing and you get yourself a nice 30-year fixed 2.25 percent this is the principle of interest payment 15.29 and what i'm going to do is i'm going to explain to you you don't always want the best rate you don't want to shell out a bunch of 2021 to save money on your mortgage payment into in 2027. chances are you might not be in the same mortgage in 2027 that's one of the factors you want to consider why you might not want to and so here's where i should have started this interest rate is called the par interest rate the par interest rate is the rate that doesn't cost any points 2.75 zero points so it's zero cost and your principal and interest payment this isn't factoring in tax insurance is 16.33 a month now you either go lower in rate and you pay or you go higher in a rate and look at this it's in parentheses the points we've got rate points cost and principal and interest in parentheses means credit so yeah i can give you a three percent i'll give you one point in credit that's four thousand dollars that'll go towards other closing costs that'll go towards prepaying your taxes and insurance that'll go towards title fees that'll go towards whatever you want it to go towards in turn for the lender giving you this credit up front they're going to charge you three percent instead of 2.75 so your monthly payment is 1686 versus 1633 on just the principal and interest you're paying an extra 53 dollars per month hopefully that makes sense and so here's the thing it's your choice you get to pick what i show consumers is that it's a law of diminishing returns more often than not because we can go up you know we can get a better rate by an eighth and it costs you three quarters of a point three thousand dollars the next eighth of a percentage point look at that it went up to 175. so it's a full point between those two it's 4 000 to go there not necessarily always worth it same thing going this way half a point full point point and a half up that that move from three and a quarter from three and eight to three and a quarter was only a quarter point instead of these half a point jumps law of diminishing returns so here is the answer to the question do i want to pay points if you take the par rate and use that as our baseline this plus tax and insurance will exclude that because it's going to be the same no matter what no matter what rate you pick your taxes are fixed your homeowners insurance is picked so just leave that out of the equation and let's just compare 275 with 2625 these payments are 26 difference and you've got a 3 000 cost and you just do some simple math and you say i think it would be the other way around 3000 divided by 26 and what would you call that roughly 110 ish 110 would be 29.60 so we'll just call it 110. that's a long time 120 months is 10 years so so this is over nine years over nine years to break even on this 3 000 you sprint up front with inflation running hot with tomorrow's dollars being less than today's dollars do i want to spend today's 3 000 to save 26 bucks a month me thinking no a quick thing to think about there is if you're on a fixed income if you're dead set you're going to stay in this house for a long long time the reasons why you might consider paying points in this scenario that i just showed it doesn't make a lot of sense to buy points to pay points i'm not advising a client to pay points but here's another caveat different loan programs different loan terms 15 20 30 year investment property single family duplex all these things that are different factors this rate sheet is not always going to be exactly like this let's look at a rate sheet on an investment property i wrote it super small but i'll say it out loud this is an investment property purchase same 400 000 loan and 3.375 is the no point option three and a quarter is a half a point three and an eighth is a point three percent is one point five two point eight seven five is two percent what i noticed when i pulled this rate sheet you can go from three point three seven five to two eight seven five for two points a full half a percent full half percent better in rate for two points if you win a full half of half of if you went a full half a percent better over here two seven five to two and a quarter it's 3.2 points so it's different proves the point different for different scenarios so on this one you buy an investment property and you're a buy and hold investor you buy this and you're telling me i'm never gonna sell this i want it's a cash flow i've got money now that i want to put down i'm not worried about an extra two or four thousand up front right now i'm holding this thing forever then we might look at okay you've got 1768 versus 1686 you want to go down to three percent on your investment property you don't mind spending the 6 000 up front if you can't see it's a point and a half and it's 6 000 to buy it down to three percent investment property purchase 1686 and 1768 using the no cost one is the baseline that is a difference of 118 dollars it's gonna cost you six million man why didn't i bring my calculator about five fifty it's gonna break even in like four years this i might be able to ride with investor tells me i want to buy it down to three percent i'll spend the point in half i mean buy it down to 2.875 if you want it's going to be similar math it's going to be a savings of oh am i tripping rewind one take no edits remember 1686 in 1768 is 14 is 82. uh that was a real smoking deal the first time i did it um 6 grand divided by 82. math don't fail me now 60 70 called 75 rough rough math six year break even yeah not as good but still if you're telling me i'm staying here forever i want the extra cash flow this 82 a month means a lot to me because that's all i'm after i'm not worried about 6000 right now with the extra 82 a month i'm gonna keep it for a long time i'm okay with this six year break even all right do it it's a lot better than this nine point something meter break even but that's how you do it and that's how you analyze is it worth it know that it's not always going to be the same rate sheet i might have a different rate sheet months from now lenders get to decide do we want to point them to par do we want to make this more affordable do we want to let them buy it down to two and a half lenders every single day change their pricing and i remember years ago where there were some crazy circumstances where a better rate was a better price trying to steer that person towards that rate they're trying to get more 2.625s they're trying to you know offer it a point in credit right here at only 0.75 credit right here meaning you know they're paying you more to take the 2.75 and take the three weird stuff like that be happening in lending so take a look get the options analyze it do the break even do what's best for you just that easy thanks for watching if you made it this far i truly appreciate you like comment subscribe share and that's it let me know what other videos you want to see i'm happy to make them take care

Channel: Matt The Mortgage Guy

Views: 20,457

Keywords: should i pay points on mortgage, mortgage points, mortgage loans, mortgage points explained, mortgage broker, mortgage loan, should i pay points on a mortgage, mortgage tips, real estate, home loan, discount points, interest rates 2021, buying house, mortgage discount points explained, home loan process, interest rates explained, closing costs in california, interest rates mortgage, closing costs explained, mortgage tips and advice, mortgage, mortgage loan points, investment

Id: 6Il8kxFku3Y

Length: 12min 38sec (758 seconds)

Published: Sat Jun 12 2021