Hey folks! Today, let's chat about an essential idea in home loans – the option to buy down your interest rate. If you're scratching your head wondering, "What's that?", imagine this: You're about to get a home loan. You could either keep the interest rate as it is or pay a bit extra to reduce it.
Understanding Points and Mortgage Rates:
What are "Points"? Think of "points" as a special deal. You pay the bank a bit more money upfront when you get your loan, and in return, they give you a lower interest rate. One point usually equals 1% of your total loan amount.
The Break-Even Point: Let's say you decide to pay an extra $2,000 to get a lower interest rate that saves you $50 each month. It would take you about 3.3 years (or 40 months) to make up for that upfront cost. If you plan to stay in your home longer than that, then it might be worth it.
What’s Happening with Interest Rates? If interest rates are staying the same or might drop, paying extra might not be the best move. But if they’re climbing, locking in a lower rate now could be smart.
How Long You’ll Have the Loan: If you're only going to be in the house for a few years or might refinance, then paying upfront might not save you money in the long run.
Do You Have Extra Money Now? Home buying has many costs. If paying for points means you’ll be tight on money for other things, think twice.
Tax Stuff: Sometimes, you can get a tax break for paying points. But it can be a bit tricky, so it's a good idea to ask someone knowledgeable about taxes.
Your Future Plans: Think about your big plans. If you're saving for something important, like college or a new car, you might want to keep your cash.
Now, back to our story. There was a homebuyer with a not-so-great credit score. Influenced by media buzz, they paid a hefty sum to immediately lower their rate. While they did get that low rate, just 10 months later, they were considering a change. This meant that their decision to pay so much upfront might not have been the best choice.
In cases like this, there are other options. Like taking out a second loan on your house or checking out interest-free credit cards. A Home Equity Line of Credit (HELOC) lets you use your home's value for things like home improvements.
Remember, each money choice has consequences. Don't rush. Know the market, understand your situation, and make decisions without fear.
Need some help with home loans? My team at New Point Lending and I are here for you. Drop us a message, call, or set up a time to chat. We're all about helping you make the best choices. 😊