I am still working on which way to finance our house purchase. Have been talking to a mortgage broker on a 30 year fixed mortgage with 20% down payment. He tells me “1 point is normal.” I understand that paying down 1 point decreases your interest rate I had asked him 1 day previously if we should pay points to pay down the interest rate, and he said, “if the interest rate goes down, you would be better off refinancing, and not paying points up front.” So, he has now given me a written estimate of all the costs involved and there is one point on these forms. So, I questioned him and said I didn’t think we would pay points. He said “One point is normal.” I am not sure of his phrasing, but that is what I understood him to say. I am extremely irritated about this. The mortgage rate he is quoting is 6.99% - that is IF we pay the one point. One point on this loan will be $5920 (loan is $592K). I am going to discuss this with him tomorrow, but wanted to get your advice. I really feel duped. I am deciding if I should be a raving maniac or if “one point is normal.” I feel like this is being sneaked in on us, and I most certainly don’t appreciate it. Thanks for your advice. I appreciate it.
I don’t know what rates are but one point could be normal. The loans I’ve gotten were without points, but the interest rate was higher. I believe that I have gotten up to three points at one time, many years ago. Points are what you pay for a lower rate. Your 6.99% could be lower than normal with one point. Go to another lender or two or three and find out. I think that one point is about 6 points per percent +/-. I don’t know the market and one point could be good or the lender could be padding the take. You might ask the lender what the rate would be for zero points.
I don’t think that is valid - and not at 7%.
Loan rates are often zip code specific so YMMV but I just used my own zip code with your data on bankrate.com with zero points and was quoted 6.64% with an upfront cost of less than $1k.
You are correct in that it doesn’t make sense to pay points when your ability to refi is just months away.
The lower the rate you can secure upfront, the less likely you are to want to refinance in the future. Even if you pay no points, every time you refinance, you will incur charges. In a low-rate environment, paying points to get the absolute best rate makes sense. You will never want to refinance that loan again.
But when rates are higher, it would actually be better not to buy down the rate. If rates drop in the future, you may have a chance to refinance before you would have fully taken advantage of the points you paid originally.
1 point is not normal in this environment unless you are purchasing a 2nd home or an investment property. With you putting 20% down on a primary, and based on your 6.99% quote with 1point; you should be able to get 7.125% with no points.
But let me back up a bit from your previous posts…are you getting a construction loan or regular conventional loan? Because if it’s a construction loan, then 1 point is normal with many lenders. You may be able to find a lender for new construction with 0.5 or even no points, but more common on new construction loans.
Lastly, you could ask him if he can match a no point quote. But then you have to go shop around.
This information coming from me, a loan officer licensed in all 50 state.
footsox,
I would also add: if your intention is to pay this loan off early (again from earlier post sounds like that is your plan), I definitely would not pay the points on a conventional loan.
I just read this article in the New York Times regarding increase in closing costs: https://www.nytimes.com/2024/03/15/business/home-closing-costs-rise.html
tlucio, Thanks for the link, but it won’t let me read it since I am not a NYTimes subscriber. I did get to read about 2 paragraphs, and it mentioned that they use discount points to lower the interest rates… That is fine, if that is the norm these days, but it seems our mortgage broker kind of sneaked that in, hoping we wouldn’t notice. I am so fed up with the home buying process… I hope we can get a house without losing our minds…
tlucio, Thanks again for your help. A couple months ago, we thought we would be building our “dream home” - new construction. But the add on’s and upgrades were absolutely out of control. We knew there would be some added costs, but it was getting sickening… So, we started looking at existing homes… so this mortgage I am asking about is for an existing home – not a construction loan/new build. There are some nice existing homes, that are in decent neighborhoods now, and the housing market is somewhat slower and allows us to look around. We are in Cape Coral, FL so it’s an interesting market sometimes. We have a relative looking at buying a house in VA right now and the homes fly off the market up there with bidding wars these days. So, we are happy that our market is not like that. Thanks again for your advice.
If you are buying an existing home, I definitely would shop around for no point rate. Rates have creeped up this past week but for comparative purposes, I’m at 6.875% no points. Ask current lender if he’ll match a rate and see how he replies.
tlucio, Thanks for your rate info. Is there a mortgage company name I can use, if I am “mentioning” this to him? In hindesight, I should have “mentioned” to him earlier on, that I was looking at my other options. Me telling him this will no doubt blindside him. I am also back to looking at an asset based loan from etrade… They have a deal now for 5.69% fixed for 3 years. NO closing costs, no loan origination fee, no points, no appraisal. It would be like we are paying cash for the house. It’s very interesting. Etrade has been bought by Morgan Stanley this past year, and it would involve me transferring specific stocks into a Morgan Stanley account (to secure the loan). They don’t call it a “Margin Loan.” It would also involve a $125 annual fee. Morgan Stanley guy is going to get back to me on exactly how much the pre-payment penalty is. (an unknown at this point) I am going to run the numbers on all options for the next couple days… But thanks if you can give me a mortgage company name. I really appreciate it.
tlucio – One more question. In googling this, I found “Mortgage Discount Points” and “Mortgage Origination Points.” I am almost certain that this mortgage guy is mentioning “one point is normal these days” and is referring to discount points to pay down the interest rate… but could he rather be referring to origination points? I am not sure I understand.
“In googling this, I found “Mortgage Discount Points” and “Mortgage Origination Points.” I am almost certain that this mortgage guy is mentioning “one point is normal these days” and is referring to discount points to pay down the interest rate… but could he rather be referring to origination points?”
It’s really the same thing: Points is prepaid interest. You are paying that upfront prepaid interest in return for that lower rate.
“I am also back to looking at an asset based loan from etrade… They have a deal now for 5.69% fixed for 3 years. NO closing costs, no loan origination fee, no points, no appraisal.”
While everyone has a different financial situation, and depending what percentage of margin loan equates to your assets; I would highly consider doing this in lieu of traditional mortgage for the time being. You have 3 years to refinance into a fixed rate mortgage…if you haven’t paid of the loan. A couple of things:
1. While margin payments are interest only, I would pay yourself back Principal & Interest so balance is lower over time.
2. One small con on this option is when you go to refinance (if you do not pay loan off by then), and with you being in Florida: your title fees on a refinance will be high. Other states, like in the midwest, have much lower title fees when refinancing.
I’ll DM you a private message on banks to reference if you decide to leverage that.
BlockquoteI’ll DM you a private message on banks to reference if you decide to leverage that.
Blockquote
It seems MF no longer offers DM/private messages. Don’t want to violate any board rules posting specifc company names but footsox, you can inform this other lender you have gotten 2 other quotes: one from a credit union and one from a large bank, and both were with zero points. See where it goes from there, but I’d be happy to provide you a quote if needed. Again just do not want to violate any rules but i believe if you google my screename along with credit union; my info pops up. Just giving you a generic quote to match, not soliciting any business.
Note, I am no expert but I am pretty sure that if you take this route, the mortgage (this is not a refi) will be at a higher rate because you won’t be refiing a mortage loan (where the load is secured by property) but instead will be doing a "cash out refi" (to pay off an “external loan” secured by investment assets). Loans against financial assets are not usually part of your credit file so taking out a loan to pay them off can be a red flag to lenders.
Are cash-out refinance rates higher?
It’s true: cash-out refinance rates are typically higher than their rate-and-term refinance counterparts’. This disparity is because mortgage lenders consider a cash-out refinance relatively higher-risk, since it leaves you with a larger loan balance than you had previously and a smaller equity cushion. In addition, lenders might view taking out cash as a method of masking serious financial issues, like overwhelming debt or impending job loss.
Hello Hawkwin,
While cashout rates can carry a higher rate, it’s never a red flag. Some lenders may require an explanation as to what you are doing with the funds. So a simple note stating you are paying back a margin loan won’t raise any flags. Most of the tiime, i just have client state “replenishing cash reserves.”
Also based on previous comments by OP: He had intentions of potentially paying off loan or drastically paying it down. Not sure of his down payment but if he goes to refinance in 3 years, and his loan-to-value is 60% or less (percent of loan in relation to value of home), very little hit to pricing on a cash-out. And the way this real estate market is going, values keep going up so that will help with his LTV. Maybe 0.125 difference in rate, but potential for no hit to the rates if loan-to-value at 60%.
That said, cash-out refis do present a tax issue, since interest paid on the cash taken out of the equity is not deductible as home mortgage interest unless the money is used to make improvements to the home.
I will also point out that if the asset loan from eTrade is not secured by the property, that interest will not be deductible as home mortgage interest. A $592.6k interest only loan at 5.69% will generate $33.7k in interest a year, which by itself, even without accounting for up to $10k in SALT deductions, medical deductions, charitable contributions, or any other itemized deductions, exceeds the standard deduction even for a MFJ couple who are both over 65.
In comparison, interest on a purchase mortgage is fully deductible, and by making it so that other deductions can be itemized, could provide some benefit to taxpayers who currently can’t itemize their deductions.
So any comparison between the asset based loan and a mortgage needs to account for the potential difference in tax-savings.
AJ
valid point but I rarely see people itemizing on taxes since they redid the tax laws back in 2017. The majority of people are taking the standard deduction as it amounts to 29,200 for married couples. And it’s a deduction, not a tax credit.
One other thing: OP would save on intangible and stamp taxes going Etrade margin route as in Florida, they tax you on the loan balance. Additional savings to compare vs itemized deduction/mortgage route. Using your example of $592,600; that amounts to $3,259.30 tax.
As I said in my post, even at 5.69% (lower than current rates) a $592.6k interest only loan at 5.69% will generate $33.7k in interest a year, which is more than enough to breach the standard deduction for MFJ, even when you add in the extra $3100 for both being over 65. Even with some principle paydown, at current rates that are close to 7%, they would likely still breach the standard deduction for several years.
Did I say it was a credit? All I said was that there could be some tax savings when purchasing with a mortgage, where interest is deductible, and that needed to be compared to purchasing with the asset based loan and then doing a cash-out refi, where none of the interest would be deductible.
AJ
But they would have to pay those taxes on the cash out re-fi that you are suggesting that they get, so you can’t completely count that as a save. You would have to adjust the save for taking the eTrade loan down for what the taxes on the re-fi loan will be.
They will need to do their analysis. They just need to be aware that if they use the eTrade loan, they likely won’t ever be able to deduct any interest, even if they refinance into a mortgage, while if they take a purchase mortgage, the interest will be deductible.
AJ
It sounds like you have a real worry. “One point is usual” can be somewhat misleading, especially if you were raised to believe that paying points was optional. Points are essentially upfront interest fees that can reduce your monthly payments, but if the broker did not make this obvious from the start, it is understandable to be angry. Before you decide what to do next, have a lengthy talk with the broker to understand why the point was included, especially if you were encouraged not to pay them at first. It’s also worth checking offers from other brokers or lenders to verify you’re getting the greatest bargain. If you are still dissatisfied, looking into other financing options may be worth considering.