We're buying a new house and got quoted 6.125% for 30-year fixed no points. Paying points didn't reduce by much (~5.82 for 1 point). I also got quoted for a 10/6 ARM at 5.25% with 1 point or 4.75% for 2 points. Thinking of going that way.
What's the 10/6 rate with no points?
I wasn't quoted but I estimate around 6% (0.4 points was a 5.75% rate)
We're buying a new house and got quoted 6.125% for 30-year fixed no points. Paying points didn't reduce by much (~5.82 for 1 point). I also got quoted for a 10/6 ARM at 5.25% with 1 point or 4.75% for 2 points. Thinking of going that way.
What's the break even time frame for the monthly payment savings vs the cost of the points? Will you live there that many years?
I wouldn't pay points, personally, but wait for rates to go down and re-fi as needed.
I tend to agree with this POV.
How would you feel if you paid the points and then rates drifted downward over the course of the next year or so?
Option 1 sounds good to me!
For the ARM comparing to itself, going from 0.4 -> 1 point pays for itself in 20 months. The extra 1 point from 1 to 2 points takes 33 months to pay for itself. Comparing to 30-year fixed no points, 1 point ARM pays for itself in 19 months. The full 2 points cost pays for itself in 24 months. We have no plans to move in the foreseeable future (15+ years is plausible).
If rates come down to ~4.5% in under 2 years I'll be a bit surprised but wouldn't mind losing a bit of those points for the chance that it takes 3 years or longer. The main risk is that rates never come down and actually go up and after 10 years we're stuck with a ridiculous rate.
I watch the Q&A after each monthly Jerome Powell presentation waiting - just waiting - for one of the reporters to ask if we are going to repeat the 1970's experience where rates were lowered in response to each recession, only to see of resurgence of inflation, necessitating the next round of increases, OR if the Fed truly means it when they talk about rates being "higher for longer"?
When I look at the
dot plot for the FFR, I am looking for signs of the 1970s scenario playing out again. FOMC members currently anticipate about a 1% cut in each of the next 2 years, FWIW. Of course, the 1970s post-recession rate cuts were much more dramatic than what's being projected now: -5.25% in '69-'71, -8.4% in '74-'76, and -8% in 1980 alone! All this swerving around led to economic disaster.
Of course, the Fed has a poor track record of anticipating its own behavior, and they could never explicitly forecast a recession even if they did do something obviously recessionary like 500 basis points of rate hikes in 14 months. Yet the dot plot tells me that even if things are going well, FOMC participants expect to leave a decent-sized gap between CPI and the FFR for a while after they hit CPI=2%, just to make sure they don't repeat the mistakes of the past. We aren't going back to ZIRP unless there's a true disaster, like Putin nuking Ukraine.
So maybe the FFR falls 2% over the next 2 years, but another thing will happen too: The yield curve will un-invert.
Your mortgage options are determined in part by the yield on the risk-free alternative. 30 year treasuries today are 1.38% BELOW the FFR, but in the near future we should expect this rate to be about 1.5%-2% ABOVE the FFR as it was in, say, 2015 or 2018. Even 10-year treasuries are usually a couple percent above the FFR if that's your baseline for mortgage rates.
So... even if the FFR is cut 2%, the un-inversion of the yield curve might reasonably be expected to leave long-duration treasury rates about 2% above the FFR. So long-duration treasuries and mortgages could stay at roughly the levels where they are today, even though the FFR is being reduced.
In conclusion, I think any mortgage points payback timeframe of 24 months or less is a good decision, based on what we know today. In my baseline scenario, rate cuts and yield curve inversion cancel each other out.