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Please confirm for me...


jq26
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We found a home. After 5 days of offers and counteroffers, we are now under agreement. We close in 5 weeks. By scraping together all of our pennies, we are able to put 20% down. :D

So I originally received a GFE and a pre-approval letter from a mortgage banker. He claims he is not a broker, but its a moot point. His fees are $1375 for the loan and his rates tend not to be the lowest around. I have Bank of America and TD Bank also sending me GFEs direct with the bank.

As of today, Bank of America quoted me $975 total fees and 5.375%. TD Bank, which is very selective in who they do business with, quoted me 5.125% and $750. I am not 100% sure they'll do my loan but they stated that they only have ONE tier of borrowers. Either you get the best rate or you are denied any loan whatsoever. They don't add to the rate at all or have any credit score tiers. It is IN or OUT with them.

So here is the real question. This is a 30 year loan, hopefully to be repaid in 15 years. This is a newish 3500 sq. foot home that we plan on spending decades in. In other words, we plan on sticking around LONG TERM. Are discount points appropriate? I can borrow from my 401k to pay discount points if need be. Here is how it plays out as of 9/21:

0 points = 5.125%

1 point = 4.875%

2 points = 4.625%

Each point saves me roughly $100/month. Each point costs me roughly $4000 (more if you factor the opportunity cost of raiding tax sheltered retirement funds). The breakpoint is roughly 40 months on this thing but if I leave my job shortly which I may, the $8000 loan will likely become a taxable distribution of income, taxed at 39% (25% fed marginal + 10% penalty + 3% state + 1% local). By my rough calculation, when factoring in tax ramifications, the real breakpoint is more like 56 months (1.39 x 40 months). That 4.625% sure looks appealing, but it comes with a hefty cost. However, the trade off of paying it is that we can pay down the principal by $200 every month and accelerate the amortization. Any thoughts???

Edited by jq26
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I don't follow the math. If 1 point costs $4000 then isn't the mortgage for $400000? That being the case, on a 30-yr FRM at amount/rates, doesn't 1 point save you roughly $60 per month and not $100? (Note: I could be missing something really simple)

Nonetheless, here's a calculator designed specifically for calculating the break-even period on Fixed Rate Mortages:

http://www.mtgprofessor.com/Calculators/Calculator11a.html

As far as opportunity cost on your 401(k), I wouldn't be overly concerned about that... the market has shown a V-shaped recovery since March and it might not be such a bad time to selloff. I'm not sure we're out of the woods, yet.

Other thoughts:

-I don't think just getting to the break-even period is good enough. That doesn't account for inflation. In order for it to be worth it, I think you need to be in the house well past the break-even period. That's JMHO...

-It's probably the right move if you know for sure that you're going to be in the house well past the break-even period.

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Even though you are staying long term....

What happens if a better re-fi comes along in 2 years? You've wasted the points on any refi inside of 4 years.

(4 years is breakeven on points here foe best rate)

The main concern is to lock lowest FIXED rate for 0 points.

5% is good money.

Before my credit went to hell I was able to lock 5.8%, 5 years ago. I still consider that great!

So even if you don't re-fi, 5% is still great mortgage interest!

I would not buy points that do not pay for themselves in less than 20 months.

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The conventional wisdom is to not buy points because most people can not resist the urge to refinance in the future.

You, on the other hand, seem to have that ability to have the 'long view' - and would not be tempted to refi in the future, which is excellent. I did not do the math, this is a philosophical POV - if your B/E is 56 mths and your savings is $60/mth or $100/mth and you are in the house for say 180 mths - then the points are worth it. The goal is to get to zero in your mortgage and have a paid off house rather than a large ATM that you pull out equity in the future. BTW, at 4.625% it would be difficult to justify any refinance in the future.

Edited by Denita
spelling!
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Woody, you are correct. I was basing it off of BoA's discount points which give 0.375% rate reductions (at least for the first point). That equals $92. Here, we are dealing with 0.25% rate reductions with TD Bank, which provide a $61 savings. My math stands corrected. However, those costs have to be taken into consideration with the additional benefits of the full deductability of the discount points. That will save me about $2000 this year (net cost is roughly $6000). And a big thanks for the Mortgage Professor link. That calculator is just what I was looking for! According to the calculator, which takes into account many factors, the break even point is 4.4 years.

trueq, I was thinking about this too. But we are at 100 year lows here. And it is highly unlikely that mortgage rates will touch 4.625% in the next two decades just based on historical norms. I think the possibility of refi is out of the question. Even if rates somehow do dip below, I'm not interested in tapping home equity. I've seen the destructive power of the refi firsthand too many times. Denita, I am thinking more along the lines of what you are thinking. If I'm in a 4.625% mortgage, rates would have to dip below 4.00% to even make it worthwhile. That would only happen if we had Great Depression II.

5.125% is a great rate. But I'd like to hunker down with the lowest possible payment for the long term haul. $120/month savings (not $200 like I incorrectly stated) over a lifetime is a nice chunk of change.

Thanks for everyone's input. You've all hit directly on what I think are the pros and cons. I just need to figure out whether I want to pony up on the front end or spread out the pain a little...

Edited by jq26
Horrific typing
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.

Congrats on finally finding a home, I know you have been looking for while....xdancex

Your best bet for the long term is buying down the rate for the smaller payment. Then divide one payment into 12ths and add that to your regular payment. Doing so will knock off 7.5yrs, reduce your net effective interest rate 2%, plus your reported as being more responsible, and your credit score goes up......:)

The next thing your going to be looking for is a lawn mower, check out either Home Depot or Sears....:mrgreen:.....

Better yet read this post for a laugh.. http://www.debt-consolidation-credit-repair-service.com/forums/showthread.php?p=1028083#post1028083

Edited by 2ndTimeAround
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