[quote=cooperthedog]
Asianautica – there are two separate items:
1) Whether no cost loans are the best choice dependent on time frame.
2) Whether buying down a loan by paying points is a better use of capital then investing it.
As to the first, no cost loans will *always* be more expensive when fully amoritized, since the APR is higher. The lender requires a premium for this “service”. The point I was trying to make is that your time horizon determines the true APR (what you actually paid over the life of the loan). Using your scenario, you would be far better paying $3900 to get a full point (~20%) rate reduction over 30 years, and with a spread that wide, your breakeven would be only one year. In your case, the lender is charging a fortune for a no cost loan. A lender *should* adjust the no cost loan’s rate to factor in the loan amount (higher balances require less premium) as well as the % diff (a point means alot more at 5% then 7%), of course many lenders will NOT adjust for these factors and happily pocket the extra premium…
As to the second issue of opportunity cost, in your scenario above, your 4k buys you a full 20% rate reduction (full point from 6.25% to 5.25%), which I wouldn’t attribute to a bargain point buydown, but rather a very pricey “no-cost” loan (which may be the norm now). Either way, you would save a substantial 90k and you would need to make > 13% ROI if you invested the 4k to just breakeven. If your scenario used a more typical rate buydown (eg 1 point equating to a 5% (1/4pt) rate reduction), the ROI would be far less, especially if holding for fewer years.
Of course many people that intend to save and invest said funds just spend them, while paying down a mortgage is a sure return.
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cooperthedog, FYI, this all started with this question:
[quote=donaldduckmoore]HLS, can I have your email address. I am interested in the 30yr at 5.0. Is that a 0 pt 0 fee loan?[/quote]
Then I concur with HLS’s answer:
[quote=HLS]You NEVER get the best rate when you get a no cost loan.[/quote]
Then there’s this comment:
[quote=carlsbadworker]However, I don’t think “it is extremely foolish to want a no cost or no fee loan, gambling that rates will go lower.” It really depends on individual situation (e.g. how much cash you have on hand, what job security youhave, what is your overall financial plan, etc).
[/quote]
So, now that you have the history of this debate, you might understand where my POV is coming from. Like I’ve said a couple of time in this thread, if you tend to flip, then it’s a no brainer that points are not for you.
FYI, your calculation is a little bit off. You do not get the whole 30 years to get $90k out of the initial $3900 in fees. You get a year to get $90k. Since after a year, the person who paid $3900 in fees would save $3900 in monthly payment too. So after 1 year, both people would have $3900 to invest. Then, you would also have to calculate in the tax the person who didn’t pay points and fees have to pay from the earning they’ve made.
Lets take your “typical” scenario with 1 points = to 5% rate vs 0 points = 5.25% rate. With a 5% rate, you pay $373k over the life of the loan. While 5.25% rate, you pay $395k over the life of the loan. So that’s a difference of $22k. 1 points is about $4000, correct? The monthly saving from a 5% rate is $61/month. It would take ~6 years to break even. So, the question then become can you make $22k in 6 years from the $4000 capital that you didn’t use in points? By my calculation, assuming you hold your investments over a year to get long term cap gain, instead of short term cap gain, you would have to get around 35% a year to break even if you didn’t get the points. This also assume that you hold on to your property/loan till you pay it off. It would change drastically if you plan to sell int after 5-7 years. Then obviously, it wouldn’t make sense to pay 1 points to only get .25% in rate deduction.
The way I see it is, the only reason why you’d want a no points no fees = no cost loan is if you’re betting that rates will go down soon or if you’re flipping.
