With interest rates rising, buyers are looking for ways to ways to lower the interest rate and thereby lowering their monthly payment. When a loan officer is offering you a lower rate, you need to ask what is that rate going to cost you. This cost is often referred to as a discount point. However, I think you should think of it as prepaid interest. You will pay a certain percentage of the loan amount (points) in order to obtain the lower interest rate.
Let’s use this fictional example of how this works on a $200,000 loan. You the buyer agree to pay 2 points to obtain a savings of 1/2% which lowers the principle and interest on the loan by $59.94 a month. This means that at the time of closing you will pay a $4000 to the lender for reducing the interest rate. Let’s call this what it is prepaid interest.
It is important to then divide the amount of monthly savings ($59.94) into the cost of the discount points ($4000) to determine the number of months that you would need to make payments on the home without refinancing the loan before you would actually see any savings. In this case 66.73 months. So on your 67th payment is when you would actually see some savings.
If you know up front that you only plan on living in this house for 3 years and then you are going to move or you are betting the interest rates will drop enough that it makes since to refinance 2-3 years from now, you could end up paying more money up front that what you will save each month on the loan. This is why it is important to always do the math before buying the rate down.
So when the rate your lender is offering you is less than another lender is offering, or your lender is showing you various rate scenarios, ask the loan officer what the cost of that rate is and then determine if it is a good idea to buy the rate down or just pay a little more each month and keep the additional money in your pocket.
If you have questions regarding real estate, please feel free to reach out to me at 405-213-2992.
Equity Homes Team Keller Williams Green Meadow 