Buying a house - someone help me understand this mortgage line that&#3 (1 Viewer)

[Spin]

So I have two different GFE on a USDA loan of 180K

One of them has the interest rate locked in for 30 years at 4.75% then in line 2 of the GFE (Credit or Charge (Points) for Interest rate) it has a discount of ($1,582).

On the 2nd it has You pay a charge of $ $3,616 for this interest rate of 4.5% This charge (points) increases your total settlement charges.


So each "point" cost 1% of total loan amount according to google? So the difference in buying 3 "points" only lowers the interest rate by .25%?

Which lowers the monthly payment from $943 to $917 (before HOA, taxes, insurance etc), a difference of $9,360 over the life of the loan, but at the cost of $5,424 up front (cost of the 3 points). Which would be a total savings of $3,936, over the life of the loan. Which is a less then 2% return on investment.

What am I missing? Because it doesn't seem like buying down the interest rate is the best use of our money, I'd rather just take the 5k now and put it in my 401k or apply it back into the house to pay it off earlier. Just seems like an expensive .25% on interest rate, which is really only seen if we make minimum payments for the full 30 years.
Someone come show me why I'm way off here... please.

 

[Dragons]

Two different banks? Or two loan options with the same bank?

.25% is not worth 3 points IMO.

 

[Dragons]

What does putting an additional $5k as a down payment do to the monthly payment?

 

[IC FBGCav]

What does putting an additional $5k as a down payment do to the monthly payment?

I am glad you are helping him, I wanted to but it is over my head.

 

[Zegras11]

What does putting an additional $5k as a down payment do to the monthly payment?

Lower it about $23/month

 

[Henry Ford]

Each point should be worth .25%

 

[jon_mx]

No way would I pay it down. The odds are very good you will pay off the loan or sell the house well before 30 years is up

 

[Thorn]

Since they aren't exactly one percent of the loan amount, I'm guessing those fees are some blend of the mortgage ins or guaranty fee, along with maybe one true "point." You should ask your loan officer.

 

[Spin]

Two different banks? Or two loan options with the same bank?

.25% is not worth 3 points IMO.

2 different banks.

Does buying these points help the sell of the loan in the secondary market?

At the moment, the way it's currently drawn up, I am buying 2 points, atm. Dropping from 5% to 4.5%. The other loan where it's at 4.75% is apparently no longer valid since the rates have increased and I didn't sign in time to lock it in.

So 2 points, for $3616. Break even point of ~138 months.

When I asked about it, he (lender) followed it up with this:

[SIZE=11pt]"However, discount points are prepaid interest charges which means they are able to be written off as mortgage interest this year not over the life of the loan. Long story short, you will get a large chunk of that back tax season next year."[/SIZE]

Seems like he's trying hard to sell me on buying these points. Trying to make sure it's in my best interest and I'm not buying something stupid to make the loan more attractive when he goes to sell it.

 

[Henry Ford]

Two different banks? Or two loan options with the same bank?

.25% is not worth 3 points IMO.

2 different banks.

Does buying these points help the sell of the loan in the secondary market?

At the moment, the way it's currently drawn up, I am buying 2 points, atm. Dropping from 5% to 4.5%. The other loan where it's at 4.75% is apparently no longer valid since the rates have increased and I didn't sign in time to lock it in.

So 2 points, for $3616. Break even point of ~138 months.

When I asked about it, he (lender) followed it up with this:

[SIZE=11pt]"However, discount points are prepaid interest charges which means they are able to be written off as mortgage interest this year not over the life of the loan. Long story short, you will get a large chunk of that back tax season next year."[/SIZE]

Seems like he's trying hard to sell me on buying these points. Trying to make sure it's in my best interest and I'm not buying something stupid to make the loan more attractive when he goes to sell it.

"... if you itemize your deductions."

 

[jon_mx]

Two different banks? Or two loan options with the same bank?

.25% is not worth 3 points IMO.

2 different banks.

Does buying these points help the sell of the loan in the secondary market?

At the moment, the way it's currently drawn up, I am buying 2 points, atm. Dropping from 5% to 4.5%. The other loan where it's at 4.75% is apparently no longer valid since the rates have increased and I didn't sign in time to lock it in.

So 2 points, for $3616. Break even point of ~138 months.

When I asked about it, he (lender) followed it up with this:

"However, discount points are prepaid interest charges which means they are able to be written off as mortgage interest this year not over the life of the loan. Long story short, you will get a large chunk of that back tax season next year."

Seems like he's trying hard to sell me on buying these points. Trying to make sure it's in my best interest and I'm not buying something stupid to make the loan more attractive when he goes to sell it.

The tax savings is probably overstated, especially if you close towards the end of the year. You will be lucky if your mortgage deductions exceed your standard deductions, meaning if they don't you will not save one dime on your taxes.

 

[Dragons]

With 3 purchases and several refi's, I've never bought points. Last loan I actually sold points to prepay PMI.

11 years is a long break even.

 

[jon_mx]

With 3 purchases and several refi's, I've never bought points. Last loan I actually sold points to prepay PMI.

11 years is a long break even.

Any payback that exceeds 5 years is not even worth considering.

 

[Thorn]

Two different banks? Or two loan options with the same bank?

.25% is not worth 3 points IMO.

2 different banks.

Does buying these points help the sell of the loan in the secondary market?

At the moment, the way it's currently drawn up, I am buying 2 points, atm. Dropping from 5% to 4.5%. The other loan where it's at 4.75% is apparently no longer valid since the rates have increased and I didn't sign in time to lock it in.

So 2 points, for $3616. Break even point of ~138 months.

When I asked about it, he (lender) followed it up with this:

[SIZE=11pt]"However, discount points are prepaid interest charges which means they are able to be written off as mortgage interest this year not over the life of the loan. Long story short, you will get a large chunk of that back tax season next year."[/SIZE]

Seems like he's trying hard to sell me on buying these points. Trying to make sure it's in my best interest and I'm not buying something stupid to make the loan more attractive when he goes to sell it.

"... if you itemize your deductions."

"and by 'chunk' I mean the fraction of those points that is equal to your tax rate."

 

[jon_mx]

Two different banks? Or two loan options with the same bank?

.25% is not worth 3 points IMO.

2 different banks.

Does buying these points help the sell of the loan in the secondary market?

At the moment, the way it's currently drawn up, I am buying 2 points, atm. Dropping from 5% to 4.5%. The other loan where it's at 4.75% is apparently no longer valid since the rates have increased and I didn't sign in time to lock it in.

So 2 points, for $3616. Break even point of ~138 months.

When I asked about it, he (lender) followed it up with this:

"However, discount points are prepaid interest charges which means they are able to be written off as mortgage interest this year not over the life of the loan. Long story short, you will get a large chunk of that back tax season next year."

Seems like he's trying hard to sell me on buying these points. Trying to make sure it's in my best interest and I'm not buying something stupid to make the loan more attractive when he goes to sell it.

"... if you itemize your deductions."

"and by 'chunk' I mean the fraction of those points that is equal to your tax rate."

And that is in the best case scenerio. With low interest rates and an ever increasing standard deductions, the home mortgage deduction is becoming worthless for the majority of homeowners.

 

[sbonomo]

Banks have what they call a par rate. So if the par rate is 4.0% any points you pay will reduce the par interest rate in increments of 1/8 of a percent. Now the size of the loan will deterine how many point you need to pay. For instance if you are taking out a 1,000,000 a point is $10,000. So if it cost $5000 to buy down that 4.0% to 3.50% you would have to pay 1/2 of a point. Your loan is 180,000 so you would have to pay roughly 3 points to move the rate the same .5%.

You honestly should find a loan broker who works with multiple banks and get thier best offer. Bank buy loans from those entities so you often can find a better deal through them (I work for a big bank). Good luck and congrats on the purchase.

 

[Spin]

Banks have what they call a par rate. So if the par rate is 4.0% any points you pay will reduce the par interest rate in increments of 1/8 of a percent. Now the size of the loan will deterine how many point you need to pay. For instance if you are taking out a 1,000,000 a point is $10,000. So if it cost $5000 to buy down that 4.0% to 3.50% you would have to pay 1/2 of a point. Your loan is 180,000 so you would have to pay roughly 3 points to move the rate the same .5%.

You honestly should find a loan broker who works with multiple banks and get thier best offer. Bank buy loans from those entities so you often can find a better deal through them (I work for a big bank). Good luck and congrats on the purchase.

What advantage does it give him if we buy the points? Does it make the loan more attractive on the secondary market if the interest rate is lower?