As UrbanTurf regularly points out, the long-term interest rates announced by Freddie Mac each week are not quite as good as advertised, as they usually carry points with them. And as interest rates approach 6%, it is critically important that borrowers understand how points work.
Points are essentially a form of pre-paid interest on a loan. When Freddie Mac issues its mortgage rates, the published average usually includes an average "point" that the lender will charge. That point translates into a percentage of the total loan that the borrower must pay up front in order to get the latest interest rate. For example, if a borrower is looking to get a $600,000 home loan and mortgage rates are at 5.5 percent, with 0.8 of a point as the average, that means that they will have to pay 0.8 percent of the total loan amount ($4,800) up front to get the quoted rate. (Of course, a variety of other factors — credit score, down payment amount — also play into getting the lowest rate available.)
Conventional wisdom suggests it takes somewhere in the 5- to 7-year range to recoup the point that you would pay upfront on a loan, which is good for buyers to keep in mind as they consider how long they will live in the property they are purchasing. For example, say that you want to take out a $500,000 home loan and you have the option of a 30-year fixed-rate mortgage at 5.5 percent with no points or 5 percent with 0.8 of a point. Monthly payments on the first option would be $2,838. After an upfront payment of $4,000, payments on the second loan would be $2,623. The time it would take to make up the difference between the two loans is about 5.5 years.
In today's mortgage market, however, it is not out of the question to find a good rate on a conventional loan that does not carry any points. A borrower just usually needs to have a very good credit history and be able to put 20 percent down.
For more on mortgage points, particularly as they relate to taxes, click here.
This article originally published at https://dc.urbanturf.com/articles/blog/first-timer_primer_interest_rates_and_mortgage_points/6745.
Most Popular... This Week • Last 30 Days • Ever
Harry Wardman is responsible for developing huge swaths of northwest DC, from row hou... read »
The NHP Foundation has submitted plans to DC's Historic Preservation Office for a new... read »
An updated look at the residential units on the boards at Union Market.... read »
The golden handcuffs of low mortgage rates; where the fastest trains are being made; ... read »
The Wall Street Journal is reporting that the Jewett House has hit the market for $14... read »
UrbanTurf has compiled virtual looks at large new developments around the DC region.... read »
With interest rates reaching their highest levels in 14 years, it is critically impor... read »
Before deciding to build an addition to your rowhouse, find out whether you'll need t... read »
A stately five-bedroom Woodley Park house has been home to not one, not two, but thre... read »
A look at the residential projects in the works within a block or two of Dave Thomas ... read »
With this weekend's DC houseboat tour a day away, UrbanTurf thought it only fitting t... read »
President Obama travels to Denver this morning to sign the stimulus bill that has bee... read »
In this week's installment of Ask An Agent, a reader wonders if there is a rule for h... read »
As The Wharf prepares to begin construction, DC's houseboat community heads to its ne... read »
In this week's installment of Ask An Agent, a reader asks a fairly common question th... read »
DC Real Estate Guides
Short guides to navigating the DC-area real estate market
We've collected all our helpful guides for buying, selling and renting in and around Washington, DC in one place. Visit guides.urbanturf.com or start browsing below!
Intro guides for first-time home buyers
Awesome and unusual real estate from across the DC Metro