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Author: rmonson Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127539  
Subject: Refinancing without paying points? Date: 4/19/2001 10:07 PM
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We are considering refinancing. My parents tell us never pay points on a mortgage, but when I suggest this to lenders they look at me like I'm nuts. What am I missing? Does anyone know of a lender that has a good rate (under 7.5) and doesn't require you to pay points?
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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19387 of 127539
Subject: Re: Refinancing without paying points? Date: 4/20/2001 1:44 AM
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Hi rmonson,

You asked;
We are considering refinancing. My parents tell us never pay points on a mortgage, but when I suggest this to lenders they look at me like I'm nuts. What am I missing? Does anyone know of a lender that has a good rate (under 7.5) and doesn't require you to pay points?

"Points" means different things to different people outside the actual finance industry. Some people understand them to be strictly the discount fees you can pay to get a lower interest rate, some feel it counts towards the whole bunch of closing costs, some feel it represents the compensation to the loan officer or banker. I'm actually in the business, and I can tell you they are all somewhat correct, but only partly...

Every different type of mortgage loan has three basic Money Parts...
1) the interest rate,
2) the Yield Spread (or discount points, or rebate, etc.),
3) the real, cash closing costs paid at closing.

You could think of these as three sides of a triangle, with the area inside the triangle being the real costs of the transaction. The inside area is somewhat negotiable, but only to a point, as nobody will work for free, and there's a lot of people involved in making the loan close. Still, the public usually only focuses on one or two sides, so the industry adjusts the remaining side(s) to allow the costs to be covered.

The public is aware of the interest rate, of course... but the confusion comes from the thought that the interest rate is the ONLY variable, therefore a loan could be shopped by comparing rates only. Of course, that's not the case at all.

The 2nd thing the public becomes a little more aware of are the closing costs. These include fees for a plethora of things that have to be done to get a loan accomplished, including appraisal, title search and insurance, closing agent (escrow), origination, processing, underwriting, tax service, recording, credit report, document prep, and another half dozen minor things.

The 3rd side to the triangle is the yield spread premium... also known as the discount points, or the rebate points. These change daily, sometimes several times a day... and actually determine what interest rates you will hear about when you shop.

Here's an example;
Let's look at a $200,000 mortgage...

The real, cash closing costs necessary to pay all the players involved will run about $4,200 to $4,500. Now I can already hear readers murmuring about how high that sounds... but trust me, that IS how much cash is actually paid to the professionals that do the deal when it gets done... it just rarely is disclosed to the public because the public can't stand to see teh real view of that side of the triangle... so it's camouflaged by shifting the following sides.

Sides 1 and 2 are the rates and fees (yield spread)...
Here's what these were for a 30 year fixed, conforming loan from one of the largest national wholesale lenders today (by the way, I can't mention the name, though you would know it, because BY LAW I'm not supposed to publish the real wholesale rates to the public because "it would screw up the game..." I don't believe in "The game!")

Rates - Fees
7.125 .500
7.250 .125
7.375 (.250)
7.500 (.500)
7.625 (.875)
7.750 (1.125)
7.875 (1.250)
8.000 (1.500)

You could have locked ANY of these rates on the left. If you chose to lock at 7 1/8% (7.125), you would be required to PAY discount points of 1/2% (.500). If you chose to lock an interest rate of 7 1/2% (7.500) the LENDER would pay discount points of 1/2%

Now, you see, these ratios change daily. Today, for example, at one point the interest rate of 7.125 had 000 discount fees... or was at what we call "Par." That means that no money changes hands in either direction at that interest rate. By the end of the day, as you can see, the interest rates and fees had fluctuated such that the same interest rate now COSTS 1/2% of a discount point to lock.

Rates and fees fluctuate UP just as quickly as DOWN... and you never know which way they are going to trend.

A common "Bait And Switch" trick the public insists on having the industry play on them goes like this;
1) The ads say "No Points Loans," and "Zero Fees Loans,"...
2) Johnny Public says "free is for me," and gives 3 or 4 a call "to shop rates" thinking he'll choose whichever quotes him the lowest rates "at no points."
3) Every banker and lender KNOWS this about Johnny Public, and they KNOW that Johnny has NO CLUE about how fast things change in the industry... so they tell hime WHATEVER they think he wants to hear and will believe in order to get him to come into THEIR bank or business to begin the process of the loan application,
4) Once Johnny chooses his bank or broker, he pretty much pats himself on the back and hunkers down, thinking the shopping game is over... and the loan officers KNOW THAT about Johnny...
5) Rates slide up a little bit, and the loan officers tell Johnny about the market volatility and how his loan is going to be just a little more than originally quoted... but "hey don't worry... it's still great, and we're still better than all those other guys..."
6) Rates slide down a little bit... but nobody bothers to tell Johnny, and Johnny doesn;t have a clue. Even Johnny the web-savvy technician is in the dark because the wholesale industry doesn't keep the real, updated rates and fees available online to the public. Only the brokers and bankers can access them with their passwords, as they are forbidden by law to disclose the real market prices to the public (again, it would spoil the game.)
7) Because rates slid down, the corresponding yield spread points go UP... but again, nobody told Johnny he has money coming back into the deal (gee, I wonder why?),
8) Even more fees are available, contributed into the closing by the lenders according to their published wholesale rates, and even more money is being compensated to the Professional Team than Johnny originally negotiated to pay... And Johnny has absolutely no clue... but he's apparently happy because hey, he really worked these guys shopping a deal and he's gettin it practically for free!
9) Johnny COULD have actually closed his loan at a significantly lower interest rate had he simply chosen to pay the real cash closing costs and had the opportunity to benefit from the rising and lowering of the interest rates... but instead he played very shortsightedly, and got fleeced in the process.

Let's look back at the three sided triangle again;
1) rates,
2) Points,
3) Costs.

The only thng that has an absolute minimum, in reality, is the space between the three sides... and you can adjust the 3 sides anyway you want to.

Here's a "rule of thumb" to use for decisions;
A) Every cash-dollar paid by you at closing eliminates TEN cash-dollars paid by you in interest over the life of a 30 year loan. That means that if you pay $1,000 in points, you will be eliminating right up front about $10,000 of interest payments over your loan.
B) Every cash-dollar paid by the lender at closing (whether you're aware of it or not), ADDS TEN CASH-DOLLARS that you will pay in interest over the course of your loan.

NOTE: This rule is important to weigh in the light of the TIME INVOLVED!

Q: When should you have the lender pay all costs? (Zero points & fees.)
A: When you will only be using the loan for 7-10 years or less and the incremental difference of a slightly higher interest rate won't really matter... for example if it's your first home and you already know it's a starter and you'll be expanding for a family in the near future...

Q: When should you pay all costs in cash, but only the costs?
A: When you expect to stay with the same loan for 10-17 or 20 years at least. In this way the interest savings will pay themselves off against the usage cost of the cash you put into the deal up front.

Q: When should you pay all the costs in cash AND pay down the interest rate with additional discount points?
A: When you're truly making a long-term investment in your property and the monthly cash flow of the payments matters more than the short term cost of current cash.

I know this was a really long answer, lesson, and explanation... and I'd be very pleasantly surprised to find out that folks actually made it to the bottom of this piece. Hopefully it is helpful, insightfull, and profitable to the readers on these boards.

My greatest desire would be that all my potential clients KNEW this information before shopping for their lenders... my life would be so much easier, and my clients would end up so much less stressed and truly happier.

If you think this is valuable, let others know.

Cheers,
Dave Donhoff
Lic. Mortgage Broker

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Author: samyers Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19392 of 127539
Subject: Re: Refinancing without paying points? Date: 4/20/2001 9:31 AM
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hi Dave

Have you ever heard of the refinancing term extension modification. About 10 years ago I simply bought down the rate on my existing mortgage with a flat fee of around $500. The rate at the time went from 10.25% to around 8%, and nothing else about the note changed. Do you know of any lenders that are still doing that? I've heard from a family member that works at a lender as a loan processor that -
1) She sees these type of loan mods all the time and
2) It does not have to be with the original lender.

Scott


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Author: LuluB Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19393 of 127539
Subject: Re: Refinancing without paying points? Date: 4/20/2001 10:01 AM
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That means that if you pay $1,000 in points, you will be eliminating right up front about $10,000 of interest payments over your loan.
B) Every cash-dollar paid by the lender at closing (whether you're aware of it or not), ADDS TEN CASH-DOLLARS that you will pay in interest over the course of your loan.


I have a question here. If I choose to pay less dollars at the time of closing (due to points), could I make up for what I did not pay if I choose to pay more principal on the house over time, above and beyond what my mortgage is every month. If I were to sock an extra $100 per month and apply it to principal, I would make up for that $10,000 of interest payments? Thanks!

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19398 of 127539
Subject: Re: Refinancing without paying points? Date: 4/20/2001 11:47 AM
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Hi Scott,

Scott;
Have you ever heard of the refinancing term extension modification. About 10 years ago I simply bought down the rate on my existing mortgage with a flat fee of around $500. The rate at the time went from 10.25% to around 8%, and nothing else about the note changed. Do you know of any lenders that are still doing that?

I must admit I'm not familiar with any lenders currently offering this type of process, however it sounds like it's probably a non-conforming B-C Loan kind of trick... and when you get into that arena it's a wild-assed wild, wild west place where pretty much anything goes. Rates are higher to cover the risks to the lenders, but terms are all over the board.

I've heard from a family member that works at a lender as a loan processor that -
1) She sees these type of loan mods all the time and
2) It does not have to be with the original lender.


Now I'm totally boggled! How would a different lender accept a fee to lower a rate for another lender? I must be missing something in the translation. Fill in the blanks, please?

Cheers,
Dave Donhoff
Lic. Mortgage Broker

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19400 of 127539
Subject: Re: Refinancing without paying points? Date: 4/20/2001 12:01 PM
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Hi Lulu,

Your question;
I have a question here. If I choose to pay less dollars at the time of closing (due to points), could I make up for what I did not pay if I choose to pay more principal on the house over time, above and beyond what my mortgage is every month. If I were to sock an extra $100 per month and apply it to principal, I would make up for that $10,000 of interest payments? Thanks!

The answer is "yes, with an explanation..."

If you pay less dollars at closing, your interest rate will reflect by being higher than if you had payed the cash. Your monthly payments, for the DURATION OF THE LOAN, will be according to that interest rate.

Thus, each month you'll have a bit higher payment than if the interest rate was lower... which is where the 1:10 ratio shows up.

Think of it like going golfing (maybe not the best metaphor for non-golfers... but work with me people!) Each fairway was 3 different tees to start from,
1) the pro tees (blue marker) farthest back from the hole,
2) the Men's tees (white marker) mid-way back from the hole,
3) the Ladie's tees (red marker) closest to the hole

When you close your loan, your setting the distance to the hole for the duration of the loan. It's cheaper to start from the farthest back tee, BUT you've got to deal with the distance every single time.

NOTE:
There are many times when, due to cash-available situations, borrowers don't have the capability of making the "best" loan positioning choice. Hey, sometimes that's the way life is... you've got to take the advantages that life offers, and run with them. When a borrower *IS* in a position to make the intelligent decisions, here's the data most folks don't know about.

Hope that's helpful,
Dave Donhoff
Lic. Mortgage Broker

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Author: samyers Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19406 of 127539
Subject: Re: Refinancing without paying points? Date: 4/20/2001 1:04 PM
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HI Dave

Sorry about the confusion. From what I can remember about the transaction when I did it is that I paid a fee of about $500 to have the note modified in terms of interest rate only. The rate I got at the time was competetive with other re-financing rates at the time. The term of the loan stayed exactly where it was, basically 27 1/2 years, and I was not required to go through any closing procedures, (title search or appraisal).
What my relative had told me was that the lender she was working at was basically the same as above but in some circumstances the lender was paying of the original mortgage and issuing a new one for the identical terms with the lower rate.
I would presume that the new lender would do some sort of credit check on you if you were switching lenders, but what would the risk be to them if they would just be taking over the servicing of the loan. I would think that the lender as long as the note was in order would not mind getting the interest.

Scott


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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19410 of 127539
Subject: Re: Refinancing without paying points? Date: 4/20/2001 1:13 PM
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Dwdonhoff:

<<<<<Have you ever heard of the refinancing term extension modification. About 10 years ago I simply bought down the rate on my existing mortgage with a flat fee of around $500. The rate at the time went from 10.25% to around 8%, and nothing else about the note changed. Do you know of any lenders that are still doing that?>>>>

"I must admit I'm not familiar with any lenders currently offering this type of process, however it sounds like it's probably a non-conforming B-C Loan kind of trick... and when you get into that arena it's a wild-assed wild, wild west place where pretty much anything goes. Rates are higher to cover the risks to the lenders, but terms are all over the board."

Dave could well be correct. OTOH, I see this kind of modifcation in comercial loans. It could work for a portfolio lender, or if the loan was individually owned (even if not by the original lender), but it would not work for any loan that had been packaged into a CMO or not work well in the typical loan servicing arrangement.

Regards, JAFO






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Author: drtoxic One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19415 of 127539
Subject: Re: Refinancing without paying points? Date: 4/20/2001 1:40 PM
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Hi Dave !

First, thank you for a very good post. Although I feel better for having read it, I can't say I feel good knowing that I may have been fleeced the last time I refinanced at zero points.

This is my situation. I currently have a 30 yr mortgage at 7.75% interest. I am considering refianancing to a 15 yr mortgage, hoping that my final monthly payment will be about what I pay now. I plan to stay in this house at least another 5-10 yrs. Based on your post, my understanding is that I would be better off (assuming that the interest rates are favorable) going with a "zero cost" loan (i.e., have the lender assume all costs).

Am I correct or is there something I'm missing ?

DrT


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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19433 of 127539
Subject: Re: Refinancing without paying points? Date: 4/20/2001 3:42 PM
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Hi Doc,

I'd need to know more details to make a recommendation, and if you'd like to do it privately, post back but unclick "Post to boards" and select "E-Mail this to author."

I suspect your best program MIGHT be a 5/1 or 7/1 30 year conforming ARM. You'll get interest rates to make the neighbors jealous, and can use the monthly savings to pay down pricipal voluntarily while keeping the discretionary power of control over your cashflow.

Hope that helps,
Dave Donhoff
Lic. Mortgage Broker

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Author: LostBoyJim Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19435 of 127539
Subject: Re: Refinancing without paying points? Date: 4/20/2001 4:04 PM
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Great Post!!

is there any way I can get you to be my Lendor if I refinance my mortage?

Actually, I am looking to get a home equity line in Real Soon Now. Any suggestion on that?

LostBoy
jim

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19440 of 127539
Subject: Re: Refinancing without paying points? Date: 4/20/2001 5:53 PM
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Thanks Jim,

Of course, I'd be very happy to arrange your financing for you... after all, that's my biz!

For Home Equity Lines Of Credit (HELOCs) there are a few awesome programs out there right now among the wholesale lenders. They basically break down to 2 different versions;

1) 5 3/4% "teaser" interest rate for the first 3 months, then converting to Prime Plus 2.

2) "Teaser" for 6 months at Prime Minus 1, then converting to Prime Plus 1.

There are other programs as well... post me off the boards and I'll help you explore them.

Cheers,
Dave Donhoff
Lic. Mortgage Broker

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Author: ARoadWarrior One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19475 of 127539
Subject: Re: Refinancing without paying points? Date: 4/22/2001 1:22 AM
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Dave,

Thanks for the excellent post! I have a question about figuring the time necessary to breakeven if you pay points on a loan. I'm defining the breakeven point as the time it takes to cover the cost of the points over the life of the loan. I've been told that to figure the breakeven point you divide the cost of the points by the differential in the payment between a 0 point loan and a loan you pay points for.

Let's say you want to borrow $200,000 and it costs 1 point (1%). Let's say the differential in the monthly payment between the loan with points and the loan without points is $25 per month. The breakeven calculation would be as follows:

Cost for Points - $200,000 X 1% = $2,000

Breakeven Point - $2,000/$25 payment differential = 80 months

Breakeven Point - 80 months/12 months per year = 6 years 8 months

Is this correct? Am I missing anything? Is there something more I need to consider here? Any help you can give me will be deeply appreciated!

Thanks,

Mike

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Author: eslovick Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19476 of 127539
Subject: Re: Refinancing without paying points? Date: 4/22/2001 3:11 AM
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Mike,

I don't know if this matters in your calculations, but points are fully deductible in the year they are paid. That could save you $560 ($2,000 at 28%) during that first year.
Maybe something to consider.

Beth

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19477 of 127539
Subject: Re: Refinancing without paying points? Date: 4/22/2001 9:18 AM
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I don't know if this matters in your calculations, but points are fully deductible in the year they are paid. That could save you $560 ($2,000 at 28%) during that first year.

Unless the thread has veered OT and unless the rules have changed, points on a refi are deductible over the life of the loan. New purchase points are deductible in the year they are paid.

rad


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Author: ARoadWarrior One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19482 of 127539
Subject: Re: Refinancing without paying points? Date: 4/22/2001 10:17 AM
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Beth,

I don't know if this matters in your calculations, but points are fully deductible in the year they are paid. That could save you $560 ($2,000 at 28%) during that first year. Maybe something to consider.

Are you sure? I refinanced my house a couple years ago and I was not allowed to deduct the entire cost of the points on my taxes that year. Instead I was told I had to amortize the cost of the points over the 30 year life of the loan. That's not much of a tax benefit. Has there been a change in the tax law my accountant may not be aware of??

Mike

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19490 of 127539
Subject: Re: Refinancing without paying points? Date: 4/22/2001 3:25 PM
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Hi Mike,

You asked;
I've been told that to figure the breakeven point you divide the cost of the points by the differential in the payment between a 0 point loan and a loan you pay points for.

Let's say you want to borrow $200,000 and it costs 1 point (1%). Let's say the differential in the monthly payment between the loan with points and the loan without points is $25 per month. The breakeven calculation would be as follows:

Cost for Points - $200,000 X 1% = $2,000
Breakeven Point - $2,000/$25 payment differential = 80 months
Breakeven Point - 80 months/12 months per year = 6 years 8 months
Is this correct?


Exactly correct! Now, fit in the exact nums per any deal in question, and you can start to see where the trade-offs come over time.

If you're expecting to be in a loan for the long-run, then pay it down as far as you're reasonably able. If you expect to be in for a shorter probability, take the higher rate and pay less in cash.

Whether you're purchasing or refinancing also makes a difference, because of the tax treatments...

Any costs you pay for a purchase, including discount points, are tax deductible in the year of the purchase... so it can be really sweet if you're buying and you know it's a long-term thing.

Costs incurred on a refi are deductible over the life of the loan.

Cheers,
Dave Donhoff
Lic. Mortgage Broker

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Author: eslovick Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19500 of 127539
Subject: Re: Refinancing without paying points? Date: 4/22/2001 7:41 PM
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rad,

Unless the thread has veered OT and unless the rules have changed, points on a refi are deductible over the life of the loan. New purchase points are deductible in the year they are paid.


Uh oh. Then I think I deducted them wrong.

Beth

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Author: eslovick Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19501 of 127539
Subject: Re: Refinancing without paying points? Date: 4/22/2001 7:44 PM
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Mike,

From rad's post, it looks like you are right. I screwed up and assumed that it was the same a an original mortgage. Uh oh.
Sorry about that.

Beth

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Author: eric72 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19533 of 127539
Subject: Re: Refinancing without paying points? Date: 4/23/2001 11:49 AM
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Dave (and anyone else),

It's been very educational reading the Q&A's concerning refinancing. My
question is:

Should we refinance our non owner occupied (rental)condo in the Monterey, CA area? Existing loan is $823/mo with $104K and 22 years remaining on a 7.75% 30 year fixed. The property is worth at least $250K. Vacancy rate is almost 0. Rent covers all costs. The object is to reduce monthly payments. Available rates as of 3 days ago for a 30 yr fixed were 6.75%, 3.7% points and $1700 closing costs and rolling all refi costs into the loan it appears that a 110K loan will cost $713/mo.

It all sounds good until we consider that if we keep the property long term, in 22 years the original loan would have been repaid while the new loan would have a balance of around $50k. The other consideration is that the deductible interest is reduced by $100/month affecting income taxes.

Any advice?

Thanks,

Eric Davis


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Author: spinning Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19534 of 127539
Subject: Re: Refinancing without paying points? Date: 4/23/2001 11:59 AM
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Dwdonhoff, great post about points. I have one question, maybe proposing a fourth side of the triangle.

If you have the cash to pay points, you also could use the cash to increase the downpayment and lower the principle. What are the advantages and disadvantages of this?

I looked at the payments based on your table of rates and points and the payments were lower if you paid more points and increased the principle accordingly. So, if you keep the loan 30 years, paying points is better than a bigger downpayment. Is this generally true or does it change as the rate table changes?

If you pay off the loan early, then the higher original principle means you owe more at payoff. Is there a rule of thumb for determining the breakeven point?

Another way to think about it is this. What if, in addition to paying points, increasing the principle, and thus lowering the payments, you made the same payments as the par loan. How long until your remaining principle is less than on the par loan?

Also, suppose you were thinking of a downpayment well above 20%. Is there a maximum number of points you can pay? Do you still get the above advantage with 5, 10, etc. points?



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Author: prosperingone Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19554 of 127539
Subject: Re: Refinancing without paying points? Date: 4/23/2001 2:12 PM
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Hi Dwdonhoff,

Thank you for providing this money saving information. I can assure you that I will make use of it, and I'm going to make friends of mine aware of this post.

prosperingone

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19576 of 127539
Subject: Re: Refinancing without paying points? Date: 4/23/2001 7:10 PM
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<<If you have the cash to pay points, you also could use the cash to increase the downpayment and lower the principle. What are the advantages and disadvantages of this?>>

Points are prepaid nonrefundable interest. Maybe they can be a good deal, but probably not. If you sell the house, or even want to refinance the mortgage, the money you paid in points is lost.

Also, most people compute the "break-even" point of points vs. payment wrong. They generally just divide the dollar amount of points by monthly savings to get the # of months to break even. But to do it accurately you have to also figure out the interest you could have made on the money you paid for the points if you had instead left it in the bank. This usually stretches the break-even point out ridiculously far.
Even doing it the wrong way the breakeven point is usually 5-8 years.

Ray

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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19608 of 127539
Subject: Re: Refinancing without paying points? Date: 4/24/2001 11:59 AM
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Points also serve as a prepayment penalty. If you paid points and pay your mortgage early (either in a lump sum or extra every month) you've paid the interest ahead of time, but you don't have money borrowed during the whole period. This leads to a higher effective interest rate.

So, anyone planning to pay extra on their mortgage (even the "13 payments a year" plan) should pay no points.

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Author: crobinso Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19612 of 127539
Subject: Re: Refinancing without paying points? Date: 4/24/2001 12:43 PM
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Dave,

"I know this was a really long answer, lesson, and explanation... and I'd be very pleasantly surprised to find out that folks actually made it to the bottom of this piece. Hopefully it is helpful, insightfull, and profitable to the readers on these boards.

My greatest desire would be that all my potential clients KNEW this information before shopping for their lenders... my life would be so much easier, and my clients would end up so much less stressed and truly happier.

If you think this is valuable, let others know.

Cheers,
Dave Donhoff
Lic. Mortgage Broker"

It was difficult reading even though you simplified it, but I read every word! I have recommended this post to the TMF Best of list, and I have emailed it to several other people. I'm sure your post will spread far and wide just from my vantage point.

Soon I will be refinancing, and I feel I will be well-armed to confront, er, negotiate with my loan officer. So yes, I think your post is valuable!!!

Thanks,
Charles



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Author: blowresh Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19634 of 127539
Subject: Re: Refinancing without paying points? Date: 4/24/2001 4:09 PM
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i don't think there was a complete answer to a question which has been also perplexing me. if i'm planning on buying a $200,000 house and staying in the house long term (more than 10 years). If i have 12,000 to use as a down payment is it better to take a 7.25% loan and put down $12,000 or pay 1 point ($1900) and get a 7% and put down $10,100

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19660 of 127539
Subject: Re: Refinancing without paying points? Date: 4/25/2001 12:57 AM
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HI Blowresh,

IN order to decide what is better, consider that each dollar the lender pays into the deal will cost you 10 dollars in interest over the 30 year loan... or about $0.33 per year... or approximately 33% straight interest cost on the cash for closing.

Alternatively, every dollar you pay INTO the deal will lower your interest rate overall such that you will GAIN 33c per year over the alternative... or another vantage is that you will REDUCE your costs of cash by 33c per year for each dollar you put in.

Another view, as some have mentioned, is that points (closing costs, origination, etc. etc.) can be considered prepayed interest. Every dollar you prepay eliminates 10 dollars over the loan's life.

So, it all boils down to where you believe you will get the best returns on your cash. If you have to pay more than 33% for immediate liquid capital, or if you can earn better than 33% on your liquid capital, or if it's simply worth 33% to you to have your liquid capital remain liquid and accessible (not a small consideration,) then NOT paying additional closing costs would be the way to go.

Many people (educated to the real costs) go somewhere in the middle.

Hope that helps with your decisions,
Dave Donhoff
Lic. Mortgage Broker

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Author: spinning Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19682 of 127539
Subject: Re: Refinancing without paying points? Date: 4/25/2001 1:07 PM
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Points are prepaid nonrefundable interest. Maybe they can be a good deal, but probably not. If you sell the house, or even want to
refinance the mortgage, the money you paid in points is lost.

Also, most people compute the "break-even" point of points vs. payment wrong. They generally just divide the dollar amount of
points by monthly savings to get the # of months to break even. But to do it accurately you have to also figure out the interest you
could have made on the money you paid for the points if you had instead left it in the bank. This usually stretches the break-even
point out ridiculously far.
Even doing it the wrong way the breakeven point is usually 5-8 years.


The first paragraph is an important point I didn't stress enough.

I calculated one example where the second paragraph seems wrong. I compared two scenarios using the interest rates and fees provided by Dwdonhoff (http://boards.fool.com/Message.asp?mid=14805315). I did a linear interpolation to find the interest rate for zero fees (probably not completely correct but ...). I used the amortization tables at http://www.web100.com/~sib/amortize.html.

Scenario 1) 100K 30 yr loan, rate 7.2916667%, no points, payment $685.00 per month.

Scenario 2) Pay 0.5% in points, borrow extra money to cover. So 100.5K loan, 30 yr, 7.125%. Payment is 677.09, pay extra 7.91 a month so same payment as Scenario 1).

According to the amortization table, the remaining principle for Scenario 2 becomes less than Scenario 1 after 42 months.

Scenario 3) Same as Scenario 2, but include fact that 0.5% point is tax deductable. Assume 28% taxes, so only need loan of 100.36K. Payment is now $676.14. Pay extra $8.86 to make payment same as Scenario 1).

Again according to the amortization table, the principle in Scenario 3 is less than Scenario 1 after 29 months.

So at least in this case, paying points and taking a larger loan can win in a relatively short time. In some sense, this strategy is like a loan with prepayment penalty.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20277 of 127539
Subject: Re: Refinancing without paying points? Date: 5/7/2001 4:41 AM
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Hi Spinning,

I had printed out your questions to answer later, got swamped, and only 'rediscovered' the questions tonight (this morning?)

Anyway, here they are;

If you have the cash to pay points, you also could use the cash to increase the downpayment and lower the principle. What are the advantages and disadvantages of this?</i?

Well, your cash has some kind of opportunity costs to it. If you spend it on either points or closing costs, you can't spend it on your lady, or at Vegas, or a new Jetski, or whatever. This is no secret, but always good to remember.

If you pay cash for down payment, you've made that cash illiquid, expensive to free up again, slow in appreciation... but you've saved yourself from paying interest (however that interest rate you've avoided will be the lowest real after-tax interest rate you'll ever see on that money.)

If you use that cash to buy down interest by paying points, you've effectively used a small amount of cash to future-leverage yourself by eliminating a significant, disproportionate amount of mortgage interest. Every dollar of buydown points will eliminate approximately $10 of lifetime loan interest. The return-on-investment on each dollar spent on points is an effective 30-35%, and there's no capital gains tax issues triggered. Now THAT's "Foolish."

This definitely makes incredible sense if;
A) you know you'll be in the loan long enough the ROI pays off the cost of the investment itself (the points,) and,
B) you've got the cash to invest.

I looked at the payments based on your table of rates and points and the payments were lower if you paid more points and increased the principle accordingly. So, if you keep the loan 30 years, paying points is better than a bigger downpayment. Is this generally true or does it change as the rate table changes?

You are completely correct, and YES, it is generally true in all discountable loan scenarios.

Rayvt points out (in one of his contradictory rants) that the lenders price discounts and rebates on loans in perfect efficiency with the markets... and this is true... meaning that there theoretically is no advantage to be wrung out of this... EXCEPT that Rayvt ignores that this scenario is pegged to a specific time frame. IF you fall into the "average borrower's category" which is;
A) Thinks you're moving in forever, but,
B) refi's or moves within 3-5 years...

The the lender wins if you take the discount points bet.

However, if you do indeed stay longer than 3-5 years, you get a pre-paid, risk free ROI that is unheard of in even the biggest of NASDAQ Bull markets... and it's already a done deal... it's locked into your loan contract... it's guaranteed! Doesn't get better than that!

If you pay off the loan early, then the higher original principle means you owe more at payoff. Is there a rule of thumb for determining the breakeven point?

It's a 10-1 payoff on cash, with a 3-5 year time-drop. In other words, your Points dollars either cost, or pay, 30-35% annually from loan inception (depending on which way you structure the loan.) With that in mind, it almost seems insane that most folks not only avoid paying points, but insist the reverse occurs by having the lenders pay the cloisng costs!

Another way to think about it is this. What if, in addition to paying points, increasing the principle, and thus lowering the payments, you made the same payments as the par loan. How long until your remaining principle is less than on the par loan?

It depends on the amounts in your example, but not rocket science to figure out. All you need is an amortization table. It's amazing how quickly it pays off.

Also, suppose you were thinking of a downpayment well above 20%. Is there a maximum number of points you can pay? Do you still get the above advantage with 5, 10, etc. points?

There is a maximum in each scenario. Obviously, without any limits you could theoretically buy down a loan to zero interest rate... or even theoretically negative interest, meaning the bank pays YOU to borrow their money. While attractive, it doesn't fly unless you're a communist/socialist government (they always seem to convince folks of the dream of a free life from pennies from heaven!)

In a best case scenario, a borrower would simply borrow the maximum Loan-To-Value possible, and pay the maximum discount to get the lowest possible rate on his money. He would then take his liquid capital and employ it where he gets significantly better rates of return than the costs. Again, not rocket-science when viewed from the clear, larger perspective... but people dig in and get all confuddled with the minutea, they forget to use a higher level of common-sense.

Of course, some could jump in and say "Dave's just another loan broker looking to make a bigger commission by talking people into borrowing more money." Totally false! Talking people into loans that don't make sense is the best way to guarantee no referrals or return business. Folks ALWAYS figure out what happened to them EVENTUALLY. In my case, if they didn't at first understand, I want them to eventually get their "Ah HA!" and realize I had tried to steer them right in the first place.

The truth is I offer what I see as intelligent... and I serve my clients however they ask me to. Sometimes that means doing what I think is dumb... but ultimately I'm not paid for making decisions FOR them, just getting the deal done as professionally as possible.

Thanks for the questions! If you found the answers helpful, hit 'reco' so others might see it (since the string is so outdated by now.)

Cheers,
Dave Donhoff
Lic. Mortgage Broker

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Author: landk Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24441 of 127539
Subject: Re: Refinancing without paying points? Date: 7/17/2001 12:19 PM
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DwDonhoff;

Just catching up on some of the previous posts on this board. Just wanted to let you know that your mortgage triangle post was simply outstanding. Best post I have read.

landk




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Author: CatherineCoy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29416 of 127539
Subject: Re: Refinancing without paying points? Date: 10/29/2001 2:01 PM
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Dave ~

You think your explanation was EASIER? Explain it to me again like I'm a two year old! And I'm in the bidness!

Catherine

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