First Time Homebuyer Information & Education

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Buy-down - "My broker says I can buy-down the rate on my mortgage. What does that mean, and how does it affect my payments?"

If you "buydown" the rate on your mortgage you are simply paying money up front to reduce the interest rate on your loan.

This is used to reduce your mortgage payment, and also may be tax deductible.

Rate buy down fee - This is a fee paid to ‘buy’ your interest rate down. It is also commonly referred to a as loan discount fee.

There is not always a consistent ratio between the discount points you pay and the amount it lowers your interest rate. The first point you pay may lower your interest rate by 0.25% but the second point may lower it by more or less than 0.25%. If you are interested in buying down your interest rate, have your mortgage broker work up several options. Make sure you calculate not only the cost and monthly savings, but the break even point as well.

Should I pay discount points to buy my rate down? - Discount points are prepaid interest, which you can pay to your broker at closing in exchange for a lower interest rate on your mortgage. Paying discount points, each of which is equal to 1% of the loan amount, is often called “buying down” your rate.

So does paying points make sense for you? The answer depends primarily on how long you plan to stay in your home, let alone the mortgage you are about to close on. First, find out how much lower your monthly payments will be if you buy your rate down by paying points. Then, calculate how long it will take for those monthly savings to add up to the cost of the points you paid. If it would take five years to break even and you’re planning to live in your home for 10, paying discount points may be a smart move. Talk with your local mortgage professional Dave Zwierecki at 440-614-0130 and to decide whether or not discount points are a smart move for you or not.

Buy-up - "My broker says I can buy-up my mortgage. What does that mean, and how can it affect my payments?"

Should You Buy Points? - How do you "buy" a better rate?

Do you plan on keeping your loan for a while? Then it may make sense to "buy" a lower interest rate by paying one or more "points."

Even if youre unsure of how long you plan to keep your mortgage before you move or refinance, paying points now for a lower rate may make sense. For example, do you have a high-paying job now but you think you might change careers in the next few years? We can help you sort it out. Its part of our finding the right loan for your means and goals.

A point -- which equals one percent (1%) of the total loan amount -- is an up-front fee that lowers your monthly interest rate and total interest due over the life of the loan. So, a one point loan will have a lower interest rate than a no point loan. Basically, when you pay points you trade off paying money later in favor of paying money now. You can pay fractions of points, meaning there are a lot of points packages that can make a loans terms more favorable if thats whats right for you.

There are a variety of rate and point combinations available. When you look at different loan programs, dont look just at the rate -- compare the whole package. Federal law requires lenders to publish their loans Annual Percentage Rate, or A.P.R.. The A.P.R. is a tool used to compare different terms, offered rates, and points.

You should be sure whether the loan you are getting into includes points or not. If it does, make sure that it is in your best interest. Will the money you save every month with a lower interest rate recoup the amount you pay in points before you sell or refinance?

Please note, when measuring the option to buy down your interest rate with points, the interest rate does not move in equal incriments as the cost. For example buying down an interest point by .25% or 1/4, will not cost exactly .25%. Also, the lower the interest rate the higher the increments of cost apply.

The loan programs that usually make sense to consider buying down the rate with points would be the 30, 20 or 15 year fixed. By selecting a long term fixed program, you are indicating that you plan on keeping your loan for a long period of time. By buying down the rate, you can save money over the long haul.

There are several things to consider when buying points. One of which is how long your going to stay in your loan. If its the final loan on the house then you may want to buy that interest rate as low as possible.

Another thing to consider is what type of points are you paying for? Are you paying origination points? If so then how many? Paying too many points in origination happens quite often. Many times the broker should instead of charging multiple points in orinination, pay a point or two to buy the rate down. If you trust your mortgage professional then you should definitely discuss the issue of what points are being charged and how are they being used.

Points to buy down interest rates are actually interests paid in advance. It is considered finance charge and therefore tax deductable. Always consult a certified tax accountant before taking such deductions as many various rules apply, such as different deductabilities of purchases and refinances.

Pay very close attention to your loan figures and numbers when you are shopping around for a mortgage loan. One mortgage professional may be quoting you an interest rate that is going to cost you 3 points or 3 percent of the loan amount to obtain, while the other mortgage professional is quoting you a rate that is not paying any points for the mortgage interest rate. Ask, if the rate includes points or not. Look at your GFE, good faith estimate, and see if there is a line item that states discount points with a fee or dollar amount listed there. If the discount points line is completed, then the rate you are obtaining is going to cost you points. Decide what your immediate and future plans are before deciding whether you would like to buy points or not. Sometimes it makes sense and sometimes it doesn't. A good mortgage professional should be able to guide you to make a good decision for your situation.

When deciding whether or not to buy points, also consider all the other costs involved with your new loan. Sometimes buying points may eat up more of your home's equity and you may not feel comfortable with that. If you are refinancing, it is usually a good idea to leave some equity in your home in case of emergencies or the need to sell quickly.


Information listed above is to be used for educational purposes only and is not guaranteed

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