If you a purchasing a home for 140K with 20% down, the amount you will
need to finance will be 112K. If you are interested in purchasing two
discount points to purchase down the rate even further, your cash
investment will only be 2240.00 not 10K (1 discount point = 1% of the
loan amount). Who told you that the cost of two discount points on a
112K loan is 10K? If the lender did, proceed with caution or
reconsider your choice in lenders (because it appears that they are
building added profit for themselves in the discount point allocation).
Before you decide to invest in discount points, I suggest you that
figure out the breakeven point (the breakeven point is the amount of
time you need to hold the mortgage before it makes sense to pay
discount points). To determine this, you will need to know the
following data; interest rate without discount points and interest rate
with discount point. I'll make some assumptions to demonstrate how to
calculate the breakeven point.
Let's assume that you have been offered the following:
Loan amount: 100K
Option 1: 6.75% with 0 points OR
Option 2: 6.50% with 2 points
Cost of 2 Discount Points: 2000
Option 1 Payment: 648.60
Option 2 Payment: 632.07
Difference Between Option 1 and Option 2 Payments: 16.53
Breakeven Point (Cost of Discount Points / Payment Difference)
In this example, the borrower would need to hold the mortgage for
approx. 121 months or 10 years in order for the investment in discount
points to make sense. Does it makes sense to invest in discount
points? The answer is dependant on how long you intend to hold the
mortgage and stay in the property.
As to your method to finance discount points, you have already noted
that it has one flaw (if you pay late, your interest rates will be
adjusted upward). As the true cost of 2 discount points on a loan
amount of 112K is only 2240.00, this approach is OK, but there are
other alternatives that are more beneficial.
If you are invested in 401K plan at work, you could consider borrowing
from it to finance the cost of the discount points. The benefits to
this approach is that the interest charged for the 401K loan is
reinvested back into your 401K. Simply put, rather then paying the
credit card co. principal and interest payments for their sole benefit,
you will be paying yourself principal and interest payments and
reinvesting the same back into your retirement fund. This approach
doesn't make sense if job stability is in question, because you would
be subject to early withdrawal penalties after you have been terminated
from your job.
As an other poster has already suggested, comparison shopping with
other lenders always makes sense and goes a long way to ensuring that
you are getting the best offer.
Regards,
H. Scott Miller
National Commercial and Residential Lender/Broker
Carteret Mortgage
TOLL FREE PHONE#: 1.877.716.6495
TOLL FREE FAX#: 1.877.578.2041
EMAIL:
Real Estate Help Desk (www.RealEstate-IQ.com)
Virtual Loan Assistant (
www.EZMortgageLoanz.com)
wrote:
My wife and I were kicking this idea around and wanted to get some
outside input.
We're buying a home for about $140K. We are able to put 20% down so we
won't have to pay PMI, but I'd like to drop my monthy payment even
further. We have zero credit card debt now, and an excellent credit
score. We were thinking about borrowing enough on one of the credit
cards to put down $10K more on the house, and purchase 2 discount
points. Before this idea we were not planning on purchasing any
discount points (don't really have the money after the 20% down) We
have a credit card convenience check for 3.99% until the balance is
paid off. So its cheap money. Yes the interest won't be tax
deductible, but the interest portion is only $20 a month, so I'm not
concerned about that.
We'd pay off the credit card loan in 5 years - thats where my $20 a
month in interest figure came from, I'm not sure its completely
correct. 5 years is the break even point for the discount points, too.
So after the 5 year period the extra credit card portion of the house
payment would be gone and we would end up with a house payment that is
$230 less than without borrowing the credit card money. Thats almost a
25% reduction.
The downside is that if our payment is even 1 day late the interest
rate will probably jump up to 16% or something. I'll cross that bridge
if I get to it, but we don't plan on being late.
So is this crazy or what? Thanks in advance for your input.