Episode 68: Discussing Discount Points
John Schutze & Andrew Thurston of Supreme Lending discuss how the point system works with home loans, and what it means to have a discount point.
3.45% is the current average interest rate, according to Freddie Mac's latest survey. However, there are a lot of factors that may bring in adjustments to that rate, John and Andrew say.
"A common phrase I hear is that people want 'no points,' or 'I don't want to pay any points!'" The Freddie Mac rate specifically includes average points of .5 -- it's not the zero point rate," John says.
"The rates that are quoted generally have some sort of associated discount points," John explains.
"We're definitely competitive out there with other lenders and banks," Andrew says.
"I had a client this week who was about to go with another lender after starting the process with us," John says. "They emailed me and said they were going to go with another lender because their rates were better. She put these round numbers in an email, and it didn't look right to me because her closing costs were $500 - so unless the lender was waqiving their fees AND the title company's fees, it just didn't add up. So in a very nice way, I told her to send me that in writing - I want to help people, and I didn't want her to go down the road and find out later about those costs. She had called online to a lender and wasn't even given a written quote!"
What is a discount point?
Discount points come up a lot, so it's important to know what they are:
"Discount points are basically money that you pay to bring the interest rate down," Andrew says. "So in this case the point is equal to 1% of the loan amount, so if you're buying a $250,000 home and putting 20% down, your loan is $200,000. So one point there is going to be $2,000. If the Freddie Mac average is half a point, then they are likely paying $1,000 to drop that interest rate a little bit."
"I'm seeing these tiers - you may pay one point just to get an 1/8th percent off, since rates are so low right now. What we're actually seeing is a lot of clients aren't paying too many points because it doesn't really pay off right now," John says.
"You pay your normal lending fees plus the title company fees, so if today you paid a point, you could get down to 3.375, paying $2,000 on a $200K house -- your payment will be $28 cheaper if you do that,' John explains. "So one thing we do is help people understand what their break-even is; so how many months would have to go by before that savings of $28 per month adds up to the $2k you paid?"
"A lot of lenders seem to give clients a one-rate option, whether discount points are included in that number or not. This is especially true with online lenders and banks, quite frankly," John says. "That's why it's so neat what we do, because we give our clients a matrix chart of different rate options so they can see what they are saving and where with different points and rates."
Bonus: Discount points are generally tax deductible, so if you pay points now, you can increase your tax deductions slightly!