Jim Valentine: Points versus adjustable-rate mortgage

In this time of rising interest rates and economic uncertainty buyers still want to buy and are looking for the best way to structure their purchase. Owner financing is being used by some sellers to attract a buyer and get a reasonable price for their property, but not everyone is in a position to offer owner financing. Buyers needing a loan that don’t want to, or can’t, pay close to 8 percent for a 30-year loan have a couple of options to consider.

A common alternative currently used is to buy the rate down by paying points. A point is equal to the loan amount so 3 points on a $400,000 loan is $12,000. The question becomes, what do you really get for that? The options need to be analyzed so you can determine the best one for your situation. For instance, some rate buy downs are for 1-3 years, commonly known as a 3-2-1 buydown.

Your rate is 3 percent below the going rate for the first year, 2 percent for the second year, and the third year after the loan started will be 1 percent below the original going rate. After that you will be at the market rate at the time the loan was initiated. If you know you will be selling in 3 years, i.e. - military family rotating, this type of program is ideal for you as it costs less than a 30-year rate buy down.

Each point will buy your rate down .25 percent. Points can be paid by buyer or by seller contribution, or a mix of both. Some big builders are offering huge incentives to buy rates down which is why you see them advertising those big numbers. They usually buy big blocks of loan commitments and use that to keep their production up. This is most often publicly traded corporate builders. A request for seller contribution for a point buy down is not unusual in this market. Such a request will coincide with the determination of pricing offered.

Adjustable-rate mortgages offer the opportunity to enjoy a fixed rate lower interest rate at the beginning of the loan that can be adjusted at an agreed-on period of time, 3-10 years. The rates usually start about 1 percent lower than the going rate and can only be adjusted after the initial fixed rate period. A 10/6 loan is fixed for 10 years and then adjusts every 6 months using the index provided for in your loan program. There are maximums that it can go up each time, also built into your loan program. If you are going to sell within the time provided for as your ARM fixed rate period, then an ARM may be a good option for you.

All investments have risk. The art is to minimize the risk and maximize the return. When considering your financing alternatives be sure to consider the risk involved in each path. If you pay a lot of points, be sure you won’t be moving soon. If you get into an ARM, be sure your index is solid and that you won’t be in the home for too long past the end of the fixed rate period. If you just want to buy a home, do it conventionally and then watch rates. It won’t cost you that much to refinance when rates drop. Don’t anticipate 2.5-3 percent money like we recently experienced, that was once in a lifetime.

Work with your lender to figure when your breakeven point will occur for the route you are taking. That is figured by dividing the cost of the points by the monthly savings. Compare that with your anticipated ownership term and you will get an idea of which way would be best if everything works out the way you are viewing it today.

Points are pre-paid and gone forever if you move sooner whereas an ARM plays out as you go along. Think about your estimated holding period and talk with your agent about which way would be best for you.

There is always the option to re-finance if rates drop or go conventional loan with minimal points and take the chance that rates will drop sooner than later at which point you can refinance. In these days of economic uncertainty and high interest rates remember to consider the emotional return on your investment. Enjoy your home.

When it comes to choosing professionals to assist you with your Real Estate needs… Experience is Priceless! Jim Valentine, RE/MAX Gold Carson Valley, 775-781-3704. dpwtigers@hotmail.com.