How To Buy Down A Mortgage Rate
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As with a conventional loan, it's possible to buy down points on a VA loan to reduce your interest rate. However, it's critical to understand both the costs and the benefits of buying discount points and whether it's the right fit for you.
It's also important to note that as mortgage rates have fallen to historic lows in 2020 and the beginning of 2021, the benefits of purchasing VA loan points may not be as pronounced as they are during times when interest rates are high.
It's possible to purchase discount points on a VA loan, which is essentially the same as paying prepaid interest. In exchange for an upfront payment at closing, the lender will reduce the interest rate on your loan.
If you're thinking of getting a VA loan and want to understand your options with buying points, speak with your lender to get information specific to your situation.How to Calculate VA Mortgage PointsThe cost of a discount point is typically 1% of the loan amount, and it buys down the rate by 0.25%. So, let's say you have a $300,000 loan with a 3.5% fixed interest rate. With a 30-year mortgage, your monthly payment would be $1,347.
Now, if you wanted to purchase one point, it'd cost you $3,000, and it would reduce your rate to 3.25%. To find out if it's worth it, you'd need to determine the monthly payment at the lower interest rate, which is $1,306. Then, you'd divide the cost of the point by the difference between the monthly payments.
Now, let's say you only want to purchase half a point. That would cost you $1,500, and it would reduce your rate to 3.375%. The difference in monthly payments with this option would be $21, and your break-even point would be about 71 months. When Does It Make Sense to Buy Down Points on a VA LoanThe break-even point is a good place to start when deciding if you should buy discount points on your VA loan. However, there are also other factors to consider to determine if it makes sense for you:
As with any financial decision, it's crucial that you take the time to consider your options, including their pros and cons, to ensure that you make the right decision.How to Buy VA Mortgage PointsYou can typically purchase VA mortgage points from your loan provider. Limits can vary based on what the lender offers, as well as limits in place by the VA. As you go through the mortgage process, speak with your loan officer or broker about purchasing discount points, and ask them to provide you with the cost and savings, so you can calculate the break-even point.
Again, take your time to research each option and speak with your lender to get as much information as possible to make a decision.Building Credit Can Help You Maximize SavingsBuying discount points on a VA loan can help drive down the cost of your monthly payment, but that comes at the cost of an upfront payment at closing. In addition to shopping around to find the best rate, it's important to make sure your credit history is in good shape before you apply for a mortgage.
When housing demand decreases in response to rising interest rates, it takes longer for some homes to sell. To speed a sale, some sellers consider a price reduction strategy. They might lower their asking price by $10,000 to $20,000 (or more). However, this strategy also reduces their profit considerably.
A buyer agrees to a sales price of $400,000 with a 5% down payment. This results in a $380,000 loan and a monthly payment of about $2,158 on a 30-year fixed rate mortgage (assuming a 5.5% mortgage rate, and excluding taxes, home insurance, and PMI).
If you can pay more than the minimum down payment on your next mortgage, ask your lender about discount points. By paying a bit more up front, you can save thousands of dollars over the life of your mortgage.
As a savvy consumer, you should always be looking for ways to shave some money from your monthly budget. Even small adjustments can add up to significant savings over the course of a year, a decade, and a lifetime. For most households, your mortgage will be the largest bill you have each month. Therefore, it is one of the best places for you to look to save money.
When you are planning to obtain a mortgage, either for a new home purchase or refinance, it pays to do your homework and get the mortgage that will cost you the least in the long run. You probably already know that you should get interest rate and closing cost quotes from multiple lenders and compare them to help you choose which lender to use. Another way you may be able to save money is by buying down your interest rate with points.
Points, also known as discount points and loan origination fees, are a form of prepaid interest on a mortgage. One point costs you 1% of the loan balance, which you pay at the time of your settlement on the home. Each point buys down your interest rate by an amount determined by the lender, usually approximately 0.25%.
For example, say you were planning to purchase a home with a 30-year, fixed-rate mortgage of $150,000 at 4.5% interest. Your lender might tell you that you could purchase one point for $1,500 and buy down your interest rate to 4.25%. You would pay that $1,500 at closing, and the lender would base your monthly payment on the mortgage amount of $150,000 and interest rate of 4.25%.
You can purchase more than one point if you would like although the amount each point will buy down your interest rate may vary. Get a quote in writing from your lender as you are making your decision. If you cannot afford to pay the points out of pocket, you may want to consider writing an offer that includes the seller paying for one or more points. Motivated sellers are often willing to do this to help find a buyer for their home.
Buying points can save you a lot of money, provided you keep the mortgage long enough. In the above example, your monthly mortgage payment would be $760 without buying any points, compared to $738 if you buy one point. This saves you $22 on your mortgage payment each month. However, remember that the point cost $1,500 upfront. Therefore, it would take 68 months or about five and a half years, to break even. If you plan to keep your mortgage at least that long, you will come out on top.
If you plan to itemize your deductions on your income tax return, you can typically deduct the cost of the points in the tax year you pay them because they are considered to be mortgage interest. This can reduce your taxable income for the year of your purchase and, in effect, partially pay you back for the money you spent on the points.
One interesting case in which buying points can help is if you are trying to buy a home that would require a mortgage slightly larger than the amount you qualify to borrow. Lenders limit your allowed monthly housing payment to 28 percent of your gross monthly income, and if your payment would be more, you may have a difficult time qualifying for a mortgage. However, if you have cash on hand to pay one or more points, you can buy down the interest rate to get your monthly payment within the necessary qualification limits.
If you are not sure how long you will live in the house, or if you plan to move or refinance within the next five years, you should not buy points. In addition, if you are getting an adjustable-rate mortgage, you should not buy points because points do not affect the interest rate once it begins to adjust. Lastly, buying points is not a good idea if you do not have money to pay for them at closing and can't get the seller to cover the cost.
As mortgage rates hit 7% and above, loan officers are seeing new borrowers increasingly interested in options that can help reduce their initial mortgage payments. These borrowers are hoping that rates will decline enough in the next few years that a refinance will bring their payments down permanently.
Generally speaking, a buydown is a real estate financing technique that makes it easier for a borrower to qualify for a mortgage with a lower interest rate. That lower rate can last for the duration of the mortgage or for a particular period of time.
A 2-1 buydown is an agreement that provides for a low interest rate for the first year of the loan, a somewhat higher rate for the second year and the full rate for the third year and beyond. The interest rate on a 2-1 buydown would be 2% below the note rate for the first year, 1% below the note rate for the second year and years three through 30 would be at the note rate.
According to experts interviewed by the Washington Post, Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) do require the borrower to qualify for their mortgage at the note rate, regardless of the buydown.
For homebuyers, there are a few potential benefits to a 2-1 buydown. Because a temporary buydown decreases their mortgage payment for the first two years, the borrower can have more money available to them during that period than they would if they were paying the full mortgage payment. That money can be used to furnish or renovate their new home, or go toward saving for other financial goals.
And for borrowers who are hoping to refinance at a lower rate in the future, using a seller concession to purchase a 2-1 buydown can result in more savings for them rather than using their own funds to make a larger down payment or buy points to permanently bring down the interest rate.
In terms of cons, a 2-1 buydown does have a high upfront cost, and may only be worth it for the buyer if they can get the buydown via a seller concession. As a seller concession, the buydown becomes part of the closing costs that the seller pays to help the buyer by reducing their closing costs.
You could buy down the 20-basis points guaranty fee by paying an upfront buydown fee that would reduce your monthly guaranty fee remittance. Conversely, you also have the option of increasing the guaranty fee that you pay Fannie Mae each month by buying up the guaranty fee and receiving cash from Fannie Mae in return.
The Loan Delivery application provides lenders with flexibility in managing guaranty fee assignments after BU/BD. Several scenarios are provided in this section to illustrate the options available and how to fully maximize these features. Each scenario provides step-by-step instructions on how to calculate the BU/BD for that particular circumstance. 59ce067264
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