The Secret Behind Points And Closing Costs: Welcome To Part 2
Welcome back to the series. In the previous edition we have covered different secrets behind points and closing costs. Some of things you may have known, some you may not have known, and then some you have heard but did not understand.
If you have not read part 1, I recommend clicking here, The Secret Behind Points And Closing Costs, because the secrets will build upon each other.
With that out of the way, let us continue with the series and uncover more secrets.
The Secret Behind Points And Closing Costs: Know What Is The Break-even Amount
What’s the break-even for buying the interest rate down? Well, for a 30-year fixed mortgage, the break-even is usually between 3 and 4 years. In other words, if you sold the property or refinanced the mortgage within 3 or 4 years, you would’ve paid more money buying the rate down.
The lower interest rate results in a lower monthly payment but it would take between 36 and 48 months to get the initial investment back. If you kept the house for longer than 3 or 4 years without refinancing, you would’ve recaptured the entire initial investment and be saving money each month for as long as you keep the mortgage.
The Secret Behind Points And Closing Costs: The Different ARMS
For a 5/1 ARM or a 7/1 ARM, the break-even is about 18 months to 2 years. That’s a much shorter period of time because one point buys more in these loan programs.
For a 2-year fixed, the break-even is usually just 14 or 15 months. So if you kept the mortgage for the first two years, you would’ve already saved money by buying the rate down at the beginning. Mathematically speaking, most people are better off buying the rate down.
The problem is that ‘points’ don’t sound very good. It sounds like you’re getting ripped off. Brokers know this so they generally don’t tell you the reality because they’re worried it’ll make their quote appear less competitive.
But the reality is that they can help you save a bunch of money if you don’t refinance every year or two.
And with lower interest rates behind us, the refinance boom is definitely over and people who refinance now should plan to keep their mortgages for as long as possible.
Remember, it doesn’t matter what anybody tells you, refinancing costs money and you should try to do so as little as possible.
The Secret Behind Points And Closing Costs: Stay Tuned For Part 3
We have covered a good amount of information in this article. However there are more secrets to be unleashed as we progress along in the series, “The Secret Behind Points And Closing Costs“. So be sure to look out for part 3 of this series. Till then Take care and have a great day.
Take Care And Have A Great Day
Dr. Gregory Stargell II
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