By Jeff Brown
"Should I pay points, or not?"
It's one of the first questions a mortgage borrower faces, and many simply reject the extra payment as an excessive cost with uncertain benefits. But in today's market, points can make good sense.
The new Consumer Financial Protection Bureau has issued proposed rules to make it easier to weigh the pros and cons of points. Likely to take effect early in 2013, the rules would allow lenders to continue offering loans with points, reversing a ban in the Dodd-Frank financial reform act of 2010.
Points are upfront interest payments that buy the borrower a lower mortgage rate and, consequently, a lower monthly payment, with each point equal to 1 percent of the loan amount. At first glance, the borrower's decision looks simple: If you will have the loan long enough for the lower payment to offset the cost of the points, paying points makes sense.
But loan terms are often hard to fathom, borrowers may not know how long they'll have the loan, and many don't want to shell out thousands more when they're already making big down payments and facing other charges.
In recent years, the no-points option has often paid off, because many borrowers refinanced after just a few years to benefit from falling mortgage rates. They didn't have their previous loans long enough for a lower payment to offset the cost of the points.
Now things are different. Mortgage rates are so low there is little chance they will fall enough to make refinancing pay, so anyone borrowing today is likely to keep the mortgage until the home is sold or the mortgage is paid off.
Also, even with the recent rebound in the housing market -- and a possibly sustainable turnaround -- the market is coming off a low base caused by the housing crash. That means that it remains hazardous to buy a home unless you plan to keep it for many years; it may well take five, eight or even 10 years for appreciation to offset a broker's commission and other buying and selling fees. Owning a home for only three or four years could be a money-loser, and if you therefore plan to own it longer, paying points could be profitable.
Having a Clear Choice
The CFPB proposal would require lenders to offer no-point options alongside mortgages with points, to make apples-to-apples comparisons easier.
Because lenders use a hodgepodge of terms to describe points, the proposed rules would require that, regardless of the lender's terminology, points result in a lower mortgage rate. (Critics say that some lenders have used confusing jargon to get people to pay upfront fees that produced no benefit.)
Use BankingMyWay's Mortgage Points Calculator to judge the potential savings from paying points. It shows how much savings can be realized by paying points if the mortgage is kept for a given number of years. It's worth running the calculation several times to see, for example, how changing the number of years in the home would affect potential savings.
Just because something was part of a Dodd-Frank ban, and caused many homeowners pain in the housing bubble, doesn't mean that it can't be your gain as a homeowner -- the CFPB is minding the store. At least it's worth pointing out that points don't have to be a dirty word in the homebuying process.
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By Jeff Brown