Im just trying to get a better understanding of what it means to buy points when doing a loan, can someone explain what that means. Also what are the pros & cons of doing it
A borrower can reduce the mortgage rate by paying for it. Let's say that a 30yr FHA loan at 4% will generate enough fees for the originator to cover his/her fees, then you can ask the originator to allow you to pay some of their fees with your cash in return for giving you a lower rate. That is called "buying down the rate".
Well it depends on the situation. I just posted last week about how I decided to NOT buy down my rate. Every persons situation is different. You have to look at how long it will take to break even on what you paid to buy down the rate. I will give you my example and why in MY case it did not make sense to buy down the rate.
I had a choice of 3.75 and get 1800 dollars back or 3.65 and pay 800 dollars. The difference in my monthly payment would be $15. so when I calculated it would take over 3 years to break even on what I paid to start seeing the benefit of my 800 if I bought down my rate. on the other side it would take 10 years before i broke even on the amount I was paid.
Now in my case I am planning a refinance in 3 years (to a conventional loan to drop the mi on my loan (assuming it makes sense to IE payments would be lower)) so in my particular case it did NOT make sense to buy down my rate.
Other situations it would.