{"id":7628,"date":"2009-03-31T21:40:47","date_gmt":"2009-04-01T04:40:47","guid":{"rendered":"http:\/\/www.bloodhoundrealty.com\/BloodhoundBlog\/?p=7628"},"modified":"2009-03-31T22:50:51","modified_gmt":"2009-04-01T05:50:51","slug":"dont-discount-points-as-a-strategy-to-lower-mortgage-costs","status":"publish","type":"post","link":"https:\/\/www.bloodhoundrealty.com\/BloodhoundBlog\/7628\/dont-discount-points-as-a-strategy-to-lower-mortgage-costs\/","title":{"rendered":"Don’t Discount Points As A Strategy To Lower Mortgage Costs"},"content":{"rendered":"

Discount fees (sometimes called “points”) are considered pre-paid interest.\u00a0 Points are generally tax-deductible<\/a> and are used to lower a buyer’s mortgage rate.\u00a0 Most real estate agents have been taught that “points” are “padded profit” to a lender or loan originator and should be avoided at all costs.\u00a0 Jeff Belonger debunked that myth yesterday<\/a>; I was surprised to see the misinformed opinions being offered by the real estate agents and mortgage originators.<\/p>\n

Today’s low interest rate environment combined with low expectation of immediate home price appreciation offers a perfect opportunity for buyers to secure a low mortgage rate by employing a strategy of “buying the rate down” through a discount fee.<\/p>\n

Let’s look at an example, from today’s rate sheet-$400,000 purchase price, $100,000 downpayment, for a 720 credit score borrower with adequate income documentation:<\/p>\n

RATE\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 DISCOUNT FEE\u00a0\u00a0\u00a0\u00a0 NET BORROWER COST <\/strong><\/strong><\/p>\n

5.00%\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 \u00a0\u00a0\u00a0\u00a0 $0<\/strong><\/strong><\/p>\n

4.75%\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0\u00a0 \u00a0 1%\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $3000<\/strong><\/p>\n

4.5%\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0\u00a0 1.5%\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $4,500<\/strong><\/p>\n

The proper way to perform this analysis is to determine the expected minimum hold time for the mortgag<\/em>e.\u00a0 Most real estate agents will agree that in this environment, transaction costs combined with low expected appreciation rates suggest that five years is the absolute minimum to hold the property.\u00a0 Buyers may elect to move (and rent) the property but few agents would be so bold as to suggest that the buyer could make a profit in less than the five year time frame.<\/p>\n

It is my opinion that refinancing the mortgage loan will be difficult and unprofitable, during those same five years because:<\/p>\n