Here’s the scenario: you are looking to purchase your home or refinance your home and are reviewing your Interest Rate Options that your lender sent you, but you notice you have lower rates but are spending more in fees to get.
These extra fees are called Discount Points and/or Pre Paid Interest. This gives you the ability to pay extra upfront in costs to get a lower rate for the life of the loan. Does this make sense to do? Not in every case, but it can be a major benefit if you plan on holding the property long term.
For example, you are refinancing your home with a $300,000 Loan Balance. You are offered a Par Rate (at no cost), but then also provided a lower rate with discount points of $2,500. The main formula you will want to see is how much is the monthly difference into how much extra you will have to pay for the lower rate. If the monthly difference is $35/monthly at a $2,500 extra cost to get the rate, your breakeven point will be 5.95 years.
In that scenario, if you plan to hold the property for that amount of time, it would be worth buying down the rate. If you are not sure and only see yourself in the home for a couple of years, then it may not be beneficial to pay for the lower rate since by the time you sell the home, you wouldn’t have recovered the fees paid upfront for the lower monthly payment.
One of the best parts of our job is what we call the numbers game. Some people love figuring out a case-by-case scenario for each investment or home loan, and others not so much.
If you need help reviewing your home loan options and seeing what’s best for you or what’s best for your investment portfolio, call our team at Blink and let us go over the numbers with you. We’ll take the time to understand the specifics and help you determine the best route for you to go.