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r/FirstTimeHomeBuyer•
ExactlyMay

Buying Points vs. Credits?

Finances

Hello!

I'm new to house buying but started to see this "credit" that people are given if they take a higher rate on their loan. Can anyone give me some pros/cons to why they took the credit or why they purchased points to lower their interest?

My plan was to buy points to get lower than 3% because that's what my first lender's pre-approval letter quoted me. I'm using a different lender now (due to my first lender saying it would take 45 days to close and I wanted it in 30 days). But, now reading others' stories I'm thinking I could switch to a higher rate 3.5% and get credits?

Posted Sep 20, 2021, 2:53 PM UTC

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leadfoot9•

Based on the loan estimates I've gotten, points are mainly a marketing scheme to make an advertised rate look good in comparison to competitors. Maybe there's a small benefit to buying them if you plan on staying in a house long-term, but even then it appears so small and have so many asterisks as to barely be worth consideration in the home-buying process. Clearly, the main reason they exist is marketing.

Credits can help ease cash to close and might be beneficial in certain tax situations. It's all just about paying money now or later.

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ExactlyMayOP•

Okay so based on your experience, the money does eventually get paid long term?

I'm planning on possibly dying in this house lol. So, definitely gonna be there forever which is why I thought the lower interest rate would be beneficial for me.

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leadfoot9•

You're paying the interest up-front. I suppose you can't lose money if you stay in the house long-term, but the opportunity cost of not having that cash in hand instead is anyone's guess. It could come in the form on missing out on other investments (most typical hypothetical example) or on needing to take out loans to cover emergency expenses because you didn't have enough of a cushion.

If you want to check the numbers, just point the expected savings on your monthly payment into the formula for an equivalent lump sum of present value money.

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ExactlyMayOP•

If you want to check the numbers, just point the expected savings on your monthly payment into the formula for an equivalent lump sum of present value money.

Thank you so much for the clarity!

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imamilehigh•

We went with a higher rate (3.25% versus 2.37%) for a credit of ~$5k. We weren’t 100% sure the house would appraise for our offer price (and we offered to pay up to a $5k difference) so we wanted the cushion. The house did appraise and now we have more cash for immediate repairs/upgrades. That’s the pro for us.

Our payment is of course a little higher per month, that’s the con. But, we’re doing a lot of work over the fall/winter. If in the spring the market stays hot and if rates stay low we’ll get a new appraisal and refi for the lower rate. A lot of ifs, but even if it doesn’t pan out 3.25% is a great rate and we’re happy to have the cash to do the work now versus over time.

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ExactlyMayOP•

Okay that makes a lot of sense. I have the cash now and didn't want to refinance because that's another hard credit check.

Idk why but I'm kind of hesitant with "re-financing"

I was thinking of my credit health initially when people mentioned the getting credits now.

Correct me if I'm wrong. So, the breakdown of the math in your case,

On a $300k house 3.25% is $9,750 2.37 is $7,110

So the difference is you're paying $2,640 more to get $5,000 now? I feel like I'm missing something.

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imamilehigh•

Interest is annual, so that example of the difference would be for 1 year, not the life of the loan. That’s why we are really hoping to refi in the spring, or at least within a year. We also have mortgage insurance because we paid less than 20% down. If we can put in the sweat equity, refi and get a lower rate plus remove the PMI (🤞) it’ll save us ~$250/month, possibly more. Given that, my very last concern is the new inquiry ding on my credit report. I will say, if we had 20% down plus another 10% for repairs/ emergency savings I’d definitely have paid 20% down and taken the lowest rate possible, hell, I’d even have paid points for a lower rate. So if you’re in a position where cash is not an issue and you have ample savings after the down payment/closing costs you probably just want to lock in the absolute lowest rate possible. Another thing that might be helpful is to shop around. I got a preapproval from a major bank first. Then my agent suggested a local lender. I got a WAY better deal with the local lender.

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teknotronic•

To toss some quick numbers at you.

 

On a $300k loan at 3.25% with a 30 year term, if you took the loan to completion you would pay roughly $170k in interest over 30 years.

at 2.37% you would pay roughly $120k in interest over 30 years.

So you would pay 50k more in interest, over the course of 30 years to get the 5k credit now.

An average of about $138/month.

 

For a personal example my loan is for 467k. I am getting a little over 8k in credits and 3.25%. With 0 credits it would be 2.875%.

At 3.25% I will pay about 265k in interest over 30 years.

At 2.875% I would pay about 230k in interest. So 35k difference, which averages to about $95/mo in order to get 8k for closing costs.

 

Smaller gap for me, so it was a pretty easy decision. It likely would of been a harder decision if my 0 credit/no points option was 2.37% as that would be $186k in interest, a difference of about 80k over 30 years or an average of $220/month.

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deg0ey•

One other thing to keep in mind here is that some lenders have flexibility to negotiate on rates/points/credits.

We got quotes from three mortgage providers - one national chain that we had used for our preapproval and two smaller brokers that were recommended by our realtor and attorney as agents they have worked with before.

The guy from the big chain quoted us 3.125% which included paying $2k for points. The other two brokers quoted us 2.875%, one with a $500 credit and the other a $1500 credit. The one with the $500 credit had lower closing costs before factoring in the credits, so we went back and said if they could match the $1500 credit the other guy was offering they would be our best offer and we were ready to lock our application in right away and they agreed to it immediately.

So my advice on this is:

  1. Don’t just go with the provider that did your pre-approval just because they did your pre-approval because you could get a better rate elsewhere

  2. Ask for recommendations from the people who work on this stuff every day - they will know who has good rates, who is most responsive to questions, who can get you to closing

  3. Don’t be afraid to play the brokers against each other, worst they can do is stick with their original quote - we went back to the guy from the national chain to let him know the other offers we had and he said he couldn’t get near them so we should take one of those

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DenProg•

I was thinking of points to lower the interest rate, but after looking at refi rates, I decided it made more sense to wait a year or two and refi.

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