So unless you have been under a rock, you know interest rates have increased this year – a lot! Some of my clients are paying points to lower their rate which can make sense. Others aren’t. What makes the most sense for you as a buyer? The answer is “it depends”!
How long do you plan to keep your new home? The other question to ask yourself is do you think rates may drop in the next year or two? If so, it doesn’t make sense to pay too much to lower your rate if you think you might refinance. You want to make sure you recoup the cost to lower your rate. No one knows for sure what will happen in the next year or two but there is some speculation that rates may drop a little in 2023 or 2024 (maybe!).
Here is an example of what it might cost you and the savings:
Loan amount $350,000   5.25% rate   5.625% rate
Monthly payment (P&I)Â Â Â $1932.71Â Â Â Â Â $2014.80
Monthly savings          $82.09
Cost to buy down rate     $3500
Breakeven point          About 3 1/2 years
So in this case if you refinance or sell within 3 years, it may not have made sense to pay points to lower your rate. Talk to your loan officer about your options and what makes sense for you. There are other things to consider too – can you write off the money you pay to lower the rate on your taxes? Can you invest that money in an account that may make more money for you? Are you using money that was in an emergency fund? Only you can answer those questions but it is something to consider.
Mortgage insurance is another area to consider if you are putting less than 20% down. Most people pay a monthly mortgage insurance and if you have good credit, it may not cost much. However there is also a one time fee you can pay at closing and then you do not increase your payment. This is an area that can save you money if you have the extra money to pay it. You may be able to finance it. But if it’s not refundable (and most aren’t unless you pay the refundable rate) and you refinance in the next year or two, you may lost some of that money. I figured out the numbers for a client recently and the one time upfront fee would have been equal to about 4 years of monthly mortgage insurance, but if he refinances in the next year or two, he loses that money.
When interest rates were lower, there were very few that were paying points to lower their rates. Now it is more common so it makes sense to talk to your loan officer to make the best decision for your situation! I always say I wish I had a crystal ball, but unfortuantely I don’t! I would love to be able to know what is going to happen to interest rates in the future, but no one knows for sure!
Leslie Vanderwerf, NMLS ID#335509, Cross Country Mortgage LLC, An Equal Housing Lender, NMLS#3029 – Email – Website