Author Topic: New home purchase rates and points HELP!  (Read 3130 times)

CDP45

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New home purchase rates and points HELP!
« on: February 23, 2013, 12:18:39 PM »
Hello fellow frugal warriors-

I have just entered under contract for my first home purchase at age 28. I went with the Dave Ramsey rule of no more than 25% of take home income for the total PITI payment, but I'm not sure how I should look at what rate to pick for the 30yr mortgage. We're putting 20% down on a conventional loan, but my options are:

3.625 itís a cost of .125% which is $292.00
3.5% its 1%...$2336.00,
Payment difference is $233,600 loan amount at 3.5% on a 30 year fixed is 1048.97 and at 3.625% Payment is $1065.34  so $16.37 in payment difference.

So calculating $2336/16.37 = 142 payments or almost 12 years to break even. Is this the right way to think about? Should i consider inflation expectations?

I'm a fan of this site but living in the west coast in a large city due to employment seems to necessitate higher rents/housing costs. Currently we're paying $1,300/mo for a very nice close in (3mi from work)1400sqft townhouse,  but the place we're buying is 2200sqft 4bd 2.5 bath nice house about 6mi from work with a total PITI of $1,500/mo not including the tax savings.

Let me know your thoughts and its so nice to know there are smart people in the world who aren't primarily motivated by accumulating junk!


clutchy

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Re: New home purchase rates and points HELP!
« Reply #1 on: February 23, 2013, 12:54:31 PM »
total interest on 3.5% = $144,029.20
total interest on 3.625% = $149,922.40

realistically you can completely affect that outcome by paying more each month early on in the loan.

basically I'd say it's up to you and I wouldn't lose ANY sleep over it.

The cost of your longer commute will most likely equate to a bigger cost difference.

CDP45

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Re: New home purchase rates and points HELP!
« Reply #2 on: February 23, 2013, 01:15:27 PM »
Sorry I meant to also ask if these rate quotes/pts were competitive? Its from my credit union so i haven't checked anywhere else. Any good place to look on the internet? Thanks!

FockerCRNA

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Re: New home purchase rates and points HELP!
« Reply #3 on: February 23, 2013, 01:16:00 PM »
Points are rarely worth it for the reason you already laid out, it takes ages for it to pay for itself. Like clutchy said, you are much better off just using that money to pay extra towards the principal.

clutchy

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Re: New home purchase rates and points HELP!
« Reply #4 on: February 23, 2013, 01:38:01 PM »
The rate is pretty good in the current environment.

I picked off a 3.25% in early december but those don't exist for 30's anymore.

MooreBonds

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Re: New home purchase rates and points HELP!
« Reply #5 on: February 23, 2013, 01:47:20 PM »
Sorry I meant to also ask if these rate quotes/pts were competitive? Its from my credit union so i haven't checked anywhere else. Any good place to look on the internet? Thanks!

A credit union will typically have better rates, on average. I have a HELOC with PenFed - if you are military you automatically qualify, or anyone (like me) can qualify for a one-time $20 membership to the National Military Family Association. PenFed has great rates. www.penfed.org Their current 30 year rate is 3.50% with zero points, but they tack on a 1% origination fee. Their other fees (appraisal, etc.) are very reasonable. So it sounds like your rate is fairly close, depending on what their good faith estimate is for all of the other miscellaneous charges that some for-profit brokers/banks will overwhelm you with at closing.

If you stick with your current loan quotes, I'd personally pick the 3.625%, since the 12 year pay-back is the nominal rate without inflation discounting, and I'd just pre-pay the loan down right off the bat with an extra $2,000 (if you do so, make sure you pay down the principal early, and they don't count it as paying your monthly payment early which may not amount to anything).

Also, check if they offer bi-weekly payments (paying your monthly payment in half, twice a month). The effect is small at first, but over 10-15 years, that 2 weeks early payment really snowballs into paying off your mortgage a year or two early as saving that extra little bit of interest (for 2 weeks) eventually adds up.


clutchy

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Re: New home purchase rates and points HELP!
« Reply #6 on: February 23, 2013, 02:30:02 PM »

Also, check if they offer bi-weekly payments (paying your monthly payment in half, twice a month). The effect is small at first, but over 10-15 years, that 2 weeks early payment really snowballs into paying off your mortgage a year or two early as saving that extra little bit of interest (for 2 weeks) eventually adds up.

that's not the only effect you're also paying 1 full extra payment per year.  26 weeks/ 2 = 13 payments.

The effect around 5-6% is usually 7 years early but with rates this low it doesn't have quite the effect but it's still substantial and worthwhile.