How does Buying Points Affect the Rate?

How does buying points affect the rate?  Example, if the mortgage rate given is 5.25 % and loan amount is $200,000 for 30 yrs and i pay one point. how much does it lower the 5.25%

2 Answers

In today's lending environment, that is a hard question to answer.  You may only be able to lower your rate by 0.125% or it could lower your rate by a full 1%.  Without getting into an in depth discussion as to why this happens (feel free to research the site and learn about Mortgage Backed Securities and their relation to rates), I will give you some generalized information that could help you.

My following examples will be based on one lender's current rate sheet:

If you were initially quoted a rate of 6.625% with no points on a 30 year fixed rate mortgage on a 60 day lock, by paying a point, you could get a rate of 5.625%.  If the initial rate were 5.5%, a point gets you 4.875%.  Finally, 5% would only drop to 4.625% with a point buydown.  You will notice that the lender gives a big incentive to drop from 6.625% but gives less incentive to buy down the 5% rate. 

In the past, there were lenders that had fixed buydown ratios, but they were usually lenders that offered relatively high rates to less credit worthy customers.

Paying points regardless if it is an origination fee or discount points can accomplish the same goal which is to lower your interest rate.  The points, in a nut shell, are the cost of the rate at that time.  In a normal market 1 point would lower an interest rate by .25%; however, we are not in a normal market, and today you could get as much as .75% to 1% lower in rate for 1 point. 

Now in terms of your example $200,000 at 5.25% and paying one point may not lower your rate at all.  You have to ask specific questions to determine the correct answer to your questions.  Today, 2/4/09 a rate of 5.25 with a 1 point origination fee is a very appropriate rate.  You should ask what rate you get if you pay 2 points.  If you can get 4.75% with 2 points that would be an effective use of your money. 

Now, please  be careful when getting a quote.  Some lenders will quote "5.25 with 1 point"  Do not assume that this is only 1 point as it could be 1 discount point and 1 orignation fee.  Always ask to be specific and always ask for as many good faith estimates as you need to be comfortable with the price.  Finally, if you shop around do not be affraid to bring one gfe to another company to compare the pricing.