When should your client pay a point? Most recently, paying the point saved my deal. Earlier this week, I had a client who was reluctant in paying a point. They were adamant on receiving a "No Point/No Fee" deal with an exceptional LOW interest rate. It was almost futile trying to reason with them. I attempted to explain that with a "No Point/No Fee" loan interest rates are generally higher when you don't pay points. I also tried to explain the concept of recouping the cost if they planned on living at the property for the long term, which they had planned on doing so. They also acknowledged that they were well aware of the concept. However, my gut feeling told me otherwise. I believe his prior negative experience with his previous loan agent was a factor in his mind-set.
I realized that a visual explanation was key in communicating my point (no pun intended) across. A visual also benefits the client(s) because they are able to take this information with them for reference and review should they need additional time to do so.
Quickly I drafted a scenario of the simplest loan situation for my client. If your client borrows $300,000:
1. Basically 1 point is equivalent to 1 percent = $3,000
2. If you decide to pay a point of $3,000, it will save you $100 a month
3. This means it will take you 30 months (or 2.5 years) to recuperate the point paid
4. If you refinance or sell your property prior to the specified duration of 30 months, it does not make sense for you to pay the point.
5. 1st compensating factor when deciding when you should pay a point is the length of time you plan on keeping the property. Paying for a point will only benefit you if you intend on keeping the property long term.
6. It is important to be aware that interest rates run in cycles
7. When rates are at historical lows, it is also a good idea to pay points. Again, if you are keeping the property long-term, this will benefit you.
8. When rates are high there is a probability that they will also drop soon thereafter. This would not be a good time to pay points.
9. Tax deductibility is another is factor to consider
10. Overall, there are many factors to consider when choosing to pay points or not.
I realize this scenario should be a trivia to many of us - the basics of our profession. But what saved me in this deal was the fact that I went with my gut instinct and was adamant in showing the pros & cons of a point vs. no point loan. My client was confident they knew everything so I returned stubbornness with perseverance and educated them with the facts. During these challenging times, not only do we need to be on top of our game, we need to be able to listen and analyze the whole scenario. Assuming could lose us the deal.
If rates are historically low why would one pay points? And not too many stay in a house for 30 years let alone 10. I'm not a point girl unless it is in football!
Good call on following your gut. I think some borrowers are nervous about looking uninformed about loan activities, probably out of fear of being taken advantage of, so in this case you were able to prove your value to them through education.
Okay, I'm back. Long day. I just thought of this one...... instead of paying points to save "x" amount of dollars. Wouldn't it be cheaper to pay to principal payments on the house a year and cut that mortgage down 7 or 8 years and minimize the amount of interest? Isn't that a better savings plan or reduction in outgoing cash vs. points?
Just a thought.
I don't think there is a no loan cost loan with 0$$ costs. Is there. Is this the buydown scenario or the fact that the ysp is paid?
good informative article! Your information will help my in the future explain points to my clients.
Nice post Jeff -
I typically break it down on paper - option 1 vs. option 2... loans are not always about interest rate, points, when you recoup the money etc....
Does the loan make sense? How does the loan benefit the borrower?
These are the questions that should be answered....
Great post Jeff!
Individual circumstances aside I've always recommended the following timeline:
-if you can recoup the cost of points in 36 months or less I recommend for it
-36-60 months is strictly the customer's call
-over 60 months and I recommend against
Barb, to answer your question, paying points often outpaces principle reduction as long as you keep the loan long enough. As Jeff stated, that is the critical factor.
That's why you would tend to not pay points in a high rate environment. The likelihood of refinancing short term are higher.
Again, great post Jeff! and I haven't seen you around much Lewis- glad to see the post!
Gerry Suarez, Jr.
Your HUD Loan Pro!
Hi there Gerry,
You're comments are correct!
I'm beginning to feel more comfortable blogging, so I hope to have more out on a regular basis. How are you doing in your area?
Thanks again!
~Jeff
Jeff,
Thankfully I've been too busy to keep blogging regularly! I have certainly seen an uptick in first time buyer volume and that is my market locally. With your values out west it's probably harder for the first timers, right?
Keep coming out with those good blogs though. There is so much in our business to talk about!
Gerry Suarez, Jr.
Your HUD Loan Pro!
Thanks, Jeff. That's a great synopsis. I have yet to have a client pay points. My first may be with an investor as the rates for investors are high right now. I don't believe paying points ever pencils out; let's face it, most people don't keep their mortgage more than 5-7 years anymore. And if a borrower is so concerned about rates, etc., I usually let them go to the cheapest and see what their experience is like. In other words, I'm not afraid of losing a deal. I think it's more important to define what type of business we have. And mine is definitely not the cheapest! Take care.