Aron Rofer is president and general counsel of Power Choice
Mortgage Advisors, a mortgage lender based in Aliso Viejo,
California. He received a bachelor’s degree from the University of California, Los Angeles, and his Juris Doctor from
the University of Southern California Law School, which he
attended on academic scholarship. Prior to entering the mortgage arena, Rofer owned a successful business litigation and
real estate law firm representing clients throughout California.
Reach him at email@example.com.
Bring Back the Buy-Down
Paying points on a mortgage fell out of favor, but the tide is once again turning
By Aron Rofer
Prior to the mortgage meltdown, “buying down” the interest rate — or paying points to refinance — was commonplace in the industry. Over the past decade, however,
there has been a shift, with borrowers and mortgage
originators becoming spoiled by the “no point, no fee”
loan options made possible by the historically low
interest rates following the Great Recession.
Most of the advertising seen on television and heard
on the radio has emphasized these “no cost” loans.
This environment has unfortunately led to many borrowers believing that they should never pay points
for a mortgage, and that it’s not in their best interest
to do so. Many newer originators in the industry also
believe this, and even some veteran originators seem
uncomfortable presenting mortgage options that
include a higher cost structure than what they have
become accustomed to in recent years.
One could reasonably argue that there is now even
a negative connotation or stigma associated with
paying points on a mortgage. This needs to change.
It’s time to bring back the interest rate buy-down.
Interest rates have spiked significantly since late last
year. In addition, the strengthening economy, combined with inflation and the Federal Reserve’s forecast for multiple rate hikes in 2017, are all indicators
that interest rates will continue to rise. This rising-rate
environment is making it increasingly difficult for
originators to provide “no point, no fee” rate and term
refinances to borrowers that result in a net tangible
An excellent way for originators to help borrowers
achieve the additional monthly savings they are looking for is through the implementation of a rate buy-down — also referred to as paying discount points.
For the right client, buy-down options can be a great
alternative to the previously prevalent “no cost” loans.
Mortgage originators should not fear a presentation
of refinance options that include points. Rather, they
should embrace the utilization of points as an effec-
tive way to provide below-market interest rates and
increased savings to their borrowers. Paying points
makes financial sense in many situations, and loan
originators should get comfortable explaining the
benefits behind a buy-down strategy to borrowers.
One benefit of paying points is that they are generally
tax deductible. Thus, the actual cost of paying points
is less than what it appears to be on the surface, once
taking into account the borrower’s reduced tax liability. Of course, borrowers should always be advised to
speak with a tax professional regarding their specific
circumstances and their ability to deduct such a cost.
Another benefit of securing a lower interest rate for
a borrower is that it results in a lower mortgage payment and less interest paid over the life of the loan.
For many borrowers, a lower monthly payment and
increased cash flow can make a huge difference in
their household budget. A lower interest rate also can
result in tens of thousands of dollars in interest savings
over the life of a loan.
A simple calculation will allow clients to see how
long it will take them to recapture the cost of the ini-
tial up-front investment of paying points. Let’s assume
a borrower is looking at a mortgage of $400,000 that
features a 30-year fixed rate with no points and an
interest rate of 4. 125 percent — resulting in a monthly
payment of $1,938 (principal and interest).
If the borrower pays 2 points (2 percent of the
loan amount, or $8,000), the interest rate will
drop to 3. 75 percent and a monthly payment of
$1,852 — which is a difference of $86 per month.
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