When rates rise, buyers fixate on the rate. But you don't write a check to an interest rate. You pay a monthly payment. Two tools can lower it: points and adjustable-rate mortgages.
Points: pay now, lower the rate
A point is a fee paid at closing to lower your interest rate. One point is 1 percent of the loan amount. On an $800,000 loan, one point is $8,000.
Think of a seesaw. More points, lower rate. Fewer points, higher rate. How much a point lowers your rate varies by lender and by the market that day, so compare exact quotes, not rules of thumb.
Find your break-even
Divide the cost of the points by what they save you each month.
If one point costs $8,000 and lowers your payment by $150 a month, you break even in about 53 months, a little under four and a half years. Keep the loan longer than that and the points pay off. Sell or refinance sooner and they don't.
Who can pay for points
You don't have to pay for them yourself.
- The seller. In a slower market, you can ask the seller to pay for points instead of cutting the price. A credit toward a lower rate can save more over time than the same amount off the price.
- Your rebate. With Arrivva, the buyer-broker fee minus our $9,750 comes back to you at closing, and you can apply it to points, within your lender's limits. See Why Real Estate Rebates Are Great for Buyers.
Taxes
Points paid on a loan to buy your main home can often be deducted in the year you pay them, if you meet the IRS tests. Points the seller pays for you are generally treated as if you paid them, and they reduce your home's cost basis. See IRS Publication 936, and check with your tax advisor.
ARMs: match the loan to how long you'll keep it
The 30-year fixed is the default for a reason. It's predictable. But many people sell or refinance well before 30 years. If you're likely to move up, move for work, or refinance within five to ten years, you may be paying for 30 years of certainty you won't use.
An adjustable-rate mortgage fixes the rate for a set period, then adjusts on a schedule.
- 5/6, 7/6, and 10/6 ARMs are fixed for 5, 7, or 10 years, then adjust every six months.
- Caps limit how much the rate can move at the first adjustment, at each adjustment after that, and over the life of the loan. Know all three numbers before you sign.
When an ARM can make sense
- You expect to sell or refinance before the fixed period ends
- The ARM's starting rate is meaningfully lower than the 30-year fixed
- You can handle the payment at the maximum rate the caps allow
When the fixed-rate premium is small, the fixed rate usually wins. When it's large, an ARM can save real money. That spread changes, so compare both every time.
Ask for the payment, not the rate
When you compare loans, ask for the full monthly payment and the cash to close for each option: 30-year fixed with no points, with one point, and a 7/6 or 10/6 ARM. Then pick the one that fits your plan.
Arrivva runs a mortgage brokerage alongside our real estate side, and we fully underwrite you before you make an offer. See how buying with Arrivva works.