Michael Holigan: What are points? You always hear about them if you're ever around lenders. So lets discuss a little bit about what they are and why you need 'em. Now a point is one percent of the loan amount, one point - one percent. Right here we've got a sales price of $100,000. We have a loan amount of $95,000 because we put five percent down or $5,000. One (1) point is one percent of the loan amount, so that's $950, one percent of $95,000. Now what will we use that for? For buy downs. You may want a better interest rate.
Let's do an example. A permanent buydown - eight percent interest, zero points in this example, cost zero dollars. Now you may want a seven and a half percent interest rate instead of eight. That's two and a half points in this example, so it's $2,375 dollars. That's two and a half, times $950. Now eight percent, principle and interest give you $697 a month P and I. Seven (7) and a half percent gives you $664 a month principle and interest. The variance is $33.00. Would you spend $2,375 to save $33.00 a month? Probably not. The reason you would do this is to qualify. Your ratios may not fit at that $697 a month payment, so you may have to have that $664 to qualify for the house that you want, and that's why you'd spend the money to get it, or you may get your builder to spend the money to get it.
A temporary buy down - a little bit different, but great to have. That's a 2-1 buy down. It's not an adjustable rate, but it's a permanent buy down. Again in our example, eight percent interest fixed rate, zero points, zero dollars. In a 2-1 buy down it changes the first three years. The first year you can have six percent interest, second year seven percent interest, the third year through the 30th year eight percent interest. And the mortgage company's going to charge us two and a half points in this example to get that, which again is $2,375, two and half times $950. The first year our principle and interest will be $570. The second year at seven percent interest, we'd be at $632 a month. The third year at eight percent interest would be at $697. Why would we do that? Well you may not be comfortable just starting right at $697. You may want to work up and as you get increases in salary, you'll be more comfortable at the higher rate, so if you have a first year or second year or third year, you may not like ARM's that could keep going up. So you'd go for a 2-1 buy down. Again, you don't have to pay this. You may be able to get your builder to spend the money. Talk to him, sit down, that's part of your negotiations.
Let's look at one other option for this. Maybe your builder won't pay for it and you don't have the money out of pocket to do a 2-1 buy down. There's premium pricing. And that's where the lender pays part of the costs. Eight (8) percent again in our example, zero point, zero dollars. But this time, eight and a half percent, the lender actually pays us two and half points; us being the buyer. We get $2,375, not in cash, but we get to use that for a buy down. Our example: the first year would could have six and a half percent interest, not six, but six and a half percent. Gives us a payment of $601.00, principle and interest each month. Second year, seven and half percent interest for $664 per month. Third year, eight and a half percent interest at $731.00. Gives you time to get used to the bigger payments, you work up over the years as you get salary increases. It's not an adjustable loan. One (1) year, two year, three years; it's fixed. After the third year it's always going to be $731.00 per month principle and interest and it didn't cost you money, because you took a higher rate. You went from eight percent to eight and a half. The lender paid down the rate and bought you this buy down. Talk with your lender, find out what payments work for you and then go ahead and get it.
Episode 023 1995 - 96 Season
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