If you're in the market for a manufactured home and need to get your financing in order then it's time to start shopping for a mortgage. There are a wide variety of terms that are used in mortgage speak but the one that may be most misunderstood is paying points to lower the interest rate. While that may sound good does it make financial sense to pay more up front to get a lower interest rate?
Points are also sometimes referred to as discount points or origination fees. In very basic terms they work like this; each point purchased is worth lowering the interest rate on percentage point. For the vast majority of manufactured home buyers buying down the interest rate does not make financial sense.
Back in the 1980s when interest rates were in the 15 to 20 percent range the idea of buying down one's rate with points was a popular option because most people couldn't afford to buy a house at such high rates. This became a problem for sellers because their homes were not moving so in many cases the sellers bought the points for the buyer, lowering the mortgage payment and selling the house.
Things don't quite work that way these days and with interest rates at record lows it doesn't make a whole lot of sense to pay a bunch of money up front in order to lower an already low rate.
Let's look at a regular mortgage and run some numbers to see is this is true. Recently mortgage rates have been around 4.5 percent so we will use that. Let's say you can afford a house that costs $350,000 with 20% down. That leaves you with a mortgage of $280,000.
If you wanted to buy down the rate by 2 percentage points you would need to bring an extra $5600 to closing ($280,000 x 2%) to pay for the points. This would lower the interest rate to 2.5 percent.
So does it make sense to pay the points for the lower interest rate or stick with the higher rate and bank the money?
Your monthly payment on a 30 year mortgage with principal and interest at 4.5% will be $1418.72. At 2.5% the payment will be $1106.34. That's a difference of $312.38 a month. That's a pretty good amount but is it worth the upfront cost.
If we divide the amount you paid for the points ($5600) by the difference in monthly payments (312.38) we get the number of months it will take to recoup the points payment; in this case about 18 months (5600/312.38 = 17.92). So you would have to live in your home for 18 months to earn back the amount you paid to lower the interest rate. That's really not that bad considering the average mortgage is kept for five years.
The question you have to ask is is it worth it to invest this extra $5600 in this manner? You could take that same $5600 and invest it in a mutual fund that gets around an 8% return. In thirty years it would be worth about $61,000 if that's all you invested.
Now let's look at the $312 monthly savings. If you took that and invested it monthly in the same mutual fund for thirty years you would have right around $468,000 in the bank. Of course you have to be disciplined and invest that monthly savings if you want to turn that $5600 dollars you spent to lower your interest rate into a small fortune.
Paying points on a manufactured home mortgage can be a powerful investing device if you have the discipline to do it. Unfortunately most people do not have the wherewithal turn a lower interest rate into something positive in the long term. If your financial situation warrants it then it might be worth the initial outlay of cash but be sure to run the numbers first because everyone's situation is different.
Points are also sometimes referred to as discount points or origination fees. In very basic terms they work like this; each point purchased is worth lowering the interest rate on percentage point. For the vast majority of manufactured home buyers buying down the interest rate does not make financial sense.
Back in the 1980s when interest rates were in the 15 to 20 percent range the idea of buying down one's rate with points was a popular option because most people couldn't afford to buy a house at such high rates. This became a problem for sellers because their homes were not moving so in many cases the sellers bought the points for the buyer, lowering the mortgage payment and selling the house.
Things don't quite work that way these days and with interest rates at record lows it doesn't make a whole lot of sense to pay a bunch of money up front in order to lower an already low rate.
Let's look at a regular mortgage and run some numbers to see is this is true. Recently mortgage rates have been around 4.5 percent so we will use that. Let's say you can afford a house that costs $350,000 with 20% down. That leaves you with a mortgage of $280,000.
If you wanted to buy down the rate by 2 percentage points you would need to bring an extra $5600 to closing ($280,000 x 2%) to pay for the points. This would lower the interest rate to 2.5 percent.
So does it make sense to pay the points for the lower interest rate or stick with the higher rate and bank the money?
Your monthly payment on a 30 year mortgage with principal and interest at 4.5% will be $1418.72. At 2.5% the payment will be $1106.34. That's a difference of $312.38 a month. That's a pretty good amount but is it worth the upfront cost.
If we divide the amount you paid for the points ($5600) by the difference in monthly payments (312.38) we get the number of months it will take to recoup the points payment; in this case about 18 months (5600/312.38 = 17.92). So you would have to live in your home for 18 months to earn back the amount you paid to lower the interest rate. That's really not that bad considering the average mortgage is kept for five years.
The question you have to ask is is it worth it to invest this extra $5600 in this manner? You could take that same $5600 and invest it in a mutual fund that gets around an 8% return. In thirty years it would be worth about $61,000 if that's all you invested.
Now let's look at the $312 monthly savings. If you took that and invested it monthly in the same mutual fund for thirty years you would have right around $468,000 in the bank. Of course you have to be disciplined and invest that monthly savings if you want to turn that $5600 dollars you spent to lower your interest rate into a small fortune.
Paying points on a manufactured home mortgage can be a powerful investing device if you have the discipline to do it. Unfortunately most people do not have the wherewithal turn a lower interest rate into something positive in the long term. If your financial situation warrants it then it might be worth the initial outlay of cash but be sure to run the numbers first because everyone's situation is different.