In all fairness, I was once a sucker. It was probably an OK deal for me. I got a 7 year balloon mortgage with 1 point and moved in slightly less than 7 years (so no loss to refinancing). I still think points complicate the issue and agree that it is usually easier, and you are less likely to make a mistake by going with the best "all in" market rate mortgage with zero points.Buying down points is a sucker's bet. The no prepayment penalty provision on most mortgages presents free arbitrage opportunities if you're willing to play the game.I currently have a 2.5% rate on an 20 year mortgage; I paid no points and don’t ever intend to going forward.
The calculators don’t adequately factor the money wasted if interest rates decline. Additionally, you may need move or sell in less time than anticipated and you will have also wasted money. Points are for suckers who want to brag about their interest rate while allowing the refinance company to grab some of their profits up front.Surprised at the number of blanket statements that points are for "suckers", or in some way "gambling" more so than not buying points, basically because interest rates could fall. I have several objections:Paying points is akin to timing the stock market. Both are a form of gambling. When you buy down the mortgage rate, you're essentially placing a bet that the rates will not drop below your rate in the next 5-7 years (or whatever the break even period is) and that you won't have to sell your house during the same period. Unless you know the future, gambling is always a bad idea.
- There are plainly some cases where buying points would end up winning. Therefore, even if these cases are a minority, you need a framework for making the decision, not a blanket rule.
- You can have expectations about interest rates falling, but you might be wrong. They could rise or stay flat for several years. Or even if they fall, they might not fall enough for a refinance to be worth it ("free" refis are not free). Or rates might only fall enough to refi after breakeven timeframe for points, which can be 3-4 years or even shorter. If that happens, even if you refi, the points will still have already paid off.
- Some points are better than others. Because of bond market quirks around demand for different coupons, I've seen a 20-25 bp rate reduction for only a half or a third of a point. These are rare but no-brainer opportunities.
- Either buying points or not buying points could be called "gambling" because both present uncertainty, and either one might "win" or "lose." But unlike gambling at a casino, you have information the house doesn't have, namely how long you expect to be in the house. The bank is optimizing based on averages, while you have specific information that may be to your advantage.
- Finally, as with any decision where the outcome is uncertain, people can have different risk preferences. Even if you believe the expected present value of points is likely negative, it may still be a reasonable to buy them because it guarantees a lower long-term payment, while waiting for interest rates to fall might never pay off.
Statistics: Posted by yatesd — Sun Aug 04, 2024 2:20 pm — Replies 33 — Views 2595