Phoenix Arizona Mortgage Rates January 16 2009
Mortgage News This Week
People are continuing to refinance (assuming they can) while rates are low – so most loan officers I know are busy. Recently we have been asked the question a number of times “does it make sense to buy the rate down any lower?” so I thought I would highlight an example of when it might make sense to pay discount points.
The general rule of thumb when paying discount points is that for every discount point (1 discount point = 1% of your loan amount) you pay, your interest rate will be lower by .25%. If you look at today’s rates (above) and were interested in an FHA 30 year fixed rate, today “par” is 5%. If you paid 1 discount point, you could reasonably expect your rate to be 4.75%.
Remember, this is a *general* rule of thumb – because sometimes it can cost less (or more) depending on any number of factors.
Using the above example $200,000 loan, if you paid one discount point, here is what the math would look like:
- $200,000 x 5% = $1,073.64 monthly payment
- $200,000 x 4.75% = 1,043.29 monthly payment
- Difference in monthly payment = $30.35 each month or $364.20/year
- Break-even = around 6 years.
When does it make sense to pay discount points? Generally speaking – the longer that you are planning on keeping the loan, the more sense it makes.
As a bonus for buyers in today’s market, I am often seeing sellers willing to pay discount points for the buyer — which is when paying discounts makes the most sense — when someone else is paying them!
{ 2 comments }
People like us are in a bind when it comes to refinancing now. We do not have to carry the mortgage insurance the way our old loan was configured. Since our home’s value has fallen we would no longer have the equity to not carry that insurance. So it does not seem a wise thing to refinance, even if rates continue to drop.
@phoenix car insurance
Thanks for commenting and bringing out a great point — for many people it makes absolutely no sense to refinance for any number of reasons and the one you highlighted is a common one.
For anyone who is thinking about refinancing, please remember that there are more things to consider than just “what is my rate?” because you could easily get a lower rate and end up with a higher payment if your new loan has mortgage insurance where your old loan did not.
Justin
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