Mortgage points are often a confusing aspect of home lending. Getting a first-time mortgage or even a refinance just by itself can be a major undertaking. There is a lot of financial information to grasp and very few places to turn for help in doing so. Sometimes it's hard for many home buyers to work out what is the best option to take.
Many potential borrowers find themselves wondering "what are points on a mortgage," how do they work and why they should be considered. Let's take a look at points and their pros and cons.
First off, a mortgage point, or discount point, is nothing more than one percent of the loan amount. When "points are paid" upfront, it means that a fee is being paid to the lender in advance of the loan. Generally, this maneuver results in a lower interest rate being charged, since the lender is getting part of its interest payment in advance. This payment does not reduce the principle amount of the loan.
For example, if a mortgage is set for $100,000 at 5 percent and 2 points, the borrower will need to pay $2,000 to the lender at the time of closing to enjoy that 5 percent rate. Most lenders offer borrowers the ability to choose a higher interest rate instead of points, which makes it easier to obtain a loan with little or no money down.
The pros and cons of going with points will depend on the individual loan and the personal financial and credit situation of the buyer, but there are some generalizations that can be made in most cases. They include:
Pros
Can result in a tax deduction. The IRS sees points, in many cases, as an advanced interest payment. This means these fees might be deductible from income taxes. The rules about how much or how little can be claimed and in what years should be reviewed carefully. On mortgage refinances, for example, the deduction might not be allowed in the year the points are paid.
Can result in a lower end price. If a mortgage is going to be kept for the duration, the end result of buying points on the front end can be great on the back end. When all is said and done, there can be some substantial money savings. It is wise to ask and see a truth in lending statement workup for both scenarios, with points paid and without. This will help show the true bottom line.
Cons
The upfront costs for buying a home are often greater when points are included in the mix. On the converse, if points are excluded, a person might have to pay later, but they can enjoy the home in the meantime.
Lost money on resale. If the intent is to keep the home and mortgage for only a short period of time, paying points probably isn't the wisest choice. The few dollars saved in monthly fees likely won't add up to cover the costs in points if a mortgage is closed out within a year or two of origination.
Making the choice between points or no points can be a little confusing. It's best to ask your lender to see a full breakdown of both options before moving forward.
By Jeff Bater
From The Wall Street Journal Online
New-home sales defied expectations and stopped sliding during July, making a modest increase that gave the beleaguered housing market a little good news.
Meanwhile, demand surged for expensive goods during July in a broad-based increase that topped expectations by a wide margin and included a strong climb in a key barometer of capital spending by businesses.
Sales of single-family homes increased by 2.8% last month to a seasonally adjusted annual rate of 870,000, the Commerce Department said Friday. June new-home sales fell 4% to an annual rate to 846,000; originally, the government said June sales dropped by 6.6% to 834,000.
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The median estimate of 23 economists surveyed by Dow Jones Newswires was a 1.4% decline in July sales to an 822,000 annual rate.
Year over year, new-home sales were 10.2% lower than the level in July 2006.
The sickly housing sector has pulled down U.S. economic growth for six straight quarters. Groundbreakings by home builders in July fell to the lowest level in 10 years. Analysts expect the slump to continue. Lenders are tightening standards for borrowers, which sent up mortgage rates during the summer. Inventories of homes are running high.
Friday's data showed the ratio of new houses for sale to houses sold slipped during July, falling to 7.5 from 7.7 in June. There were an estimated 533,000 homes for sale at the end of July, down from June's 538,000. The median price of a new home increased by 0.6% to $239,500 in July from $238,100 in July 2006. The average price decreased by 3.4% to $300,800 from $311,300 a year earlier. In June this year, the median price was $230,600 and the average was $304,900.
Regionally last month, new-home sales increased 22.4% in the West and 0.6% in the South. Demand plunged 24.3% in the Northeast and dropped 0.9% in the Midwest. An estimated 74,000 homes were actually sold in July, down from 77,000 in June, based on figures not seasonally adjusted.
Posted by the Asbury Park Press on 08/26/07
If you are selling property now in a market bedeviled by huge inventories of homes and a credit crunch, you could do better if you dumped your real-estate agent.
With a wide range of flat-fee and Internet-based services, you may fare well on your own, yet it's still important to know your options.
For years, homeowners relied upon licensed real-estate agents or brokers, who charged from 5 percent to 7 percent commissions. These middlemen included your home in the industry's Multiple Listing Service and did marketing, advertising and negotiating.
What if you listed and sold the property yourself and avoided the commission?National Real Estate Listings without the Commissions!
According to a recent study, people who used a "for sale by owner" Web site, also known as FSBO, got at least as much for their homes as those who went through a conventional broker.
In many cases, considering the Web site only charged a flat fee, the vendors obtained a higher net selling price than through broker contracts.
Researchers Aviv Nevo and Igal Hendel of Northwestern University, and Francois Ortalo-Magne of University of Wisconsin-Madison examined sales conducted from 1998 to December 2004 through the Web site www.FSBOMadison.com.
Shorter time
Although the study only looked at one Internet service, it noted that listing on the MLS — instead of the Web site — "does shorten the time it takes to sell a house."
The study is welcome news for sellers who want to lower their commission costs and boost net sales prices.
Homeowners could use some help when dealing with the real-estate industry these days. As the revolution in do-it-yourself home selling takes on new forms, it isn't having a significant impact in lowering brokerage expenses.
While housing prices have risen over the past five years, when adjusted for inflation, commissions haven't dropped, even with new services and increased efficiencies in real-estate transactions.
"From 1998 to 2005, U.S. housing prices climbed 37 percent in real terms, and, although national average commission rates appear to have fallen from 5.5 percent to 5 percent, average brokerage fees per transaction rose 26 percent in real terms during the same period," according to a U.S. Federal Trade Commission report published in April.
Industry defenses
The mainstream real-estate brokerage industry has fought discounting in a number of ways.
In 10 states, the industry has succeeded in having "anti- rebate" laws enacted that forbid brokers from discounting commissions, according to the FTC.
Agents typically split their fees with cooperating brokers. In anti-rebate states, no commission discount would be allowed, a practice that clearly hurts home sellers.
Another seemingly anti-consumer tactic is a "minimum-service law" in seven states that requires real-estate brokers to provide specific services.
Local real-estate groups were also accused of restricting flat-fee brokers' access to multiple listing services, which has resulted in several suits against industry organizations by the FTC during the past year.
Right service
Echoing the findings of the trade commission, the Consumer Federation of America, a Washington-based public-action group, found in its own report last year that "the desire of traditional brokers to "double dip' — where one broker collects all of the commission — lies behind all of their anti- competitive actions."
Is greed good when you are desperate to sell a property? Or are you better off avoiding a full-service broker altogether? The answer depends on how adept you are at selling your own property.
If you need full service and your broker can deliver a sale based on his referral network, then it may be worth the commission. If not, you have some options.
"Limited Service" or "Flat-Fee" brokers may charge you as much as $595 for listing or advertising your home. But that's all they are obligated to do.
You can often find a cheaper "MLS-only" package that will only add your home in the industry's listing service. You are responsible for advertising, showing and negotiating.
"Flat-Fee Plus" packages often include negotiating and other assistance for an additional $1,500 or more. You can also upgrade to full service at discounted rates with some online brokers.
Legitimate buyer
Keep in mind that if you take the do-it-yourself route, while your net sales proceeds will be higher, you will have to do much more work and it may take longer to close a sale.
The bottom line is finding a legitimate buyer who is willing to pay the highest possible price. If you have a buyer already lined up or live in a high-demand neighborhood, you certainly don't need a full-service broker.
Should you not feel comfortable marketing your home, brokers with advertising and referral resources may be a better bet. They are also helpful in finding financing.
Although commissions are still too high in an era in which securities and mutual-fund commissions have dropped to practically nothing, there's still the guiding hand of economic self interest that influences who is likely to close a deal.
As the FTC study notes, "brokers have certain incentives to "steer' consumers toward those homes that offer the highest cooperating broker commission and away from homes listed by brokers known to charge discounted commission rates."
ON THE WEB: Visit our Web site, www.app.com, and click on this story for a link to a bonus William Pesek column.
John F. Wasik, author of "The Merchant of Power," is a columnist for Bloomberg News.
By David Leonhardt, Vikas Bajaj
New York Times
Published on: 08/26/07
The median price of American homes is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950.Thinking of Selling Your Home? Let REALTORS® Compete For Your Business!
Economists say the decline, which could be foreshadowed in a widely followed government price index to be released this week, will probably be modest —- from 1 percent to 2 percent —- but could continue in 2008 and 2009. Rather than being limited to the once-booming Northeast and California, price declines are also occurring in cities such as Chicago, Minneapolis and Houston, where the increases of the last decade were modest by comparison.
Home prices in Atlanta —- which rose far less than in some other cities during the first half of this decade —- are essentially flat.
The predicted national reversal is particularly striking because many government officials and housing-industry executives had said that a nationwide decline would never happen, even though prices had fallen in some coastal areas as recently as the early 1990s.
While the housing slump has already rattled financial markets, it so far has had only a modest effect on consumer spending and economic growth. But forecasters believe its impact will lead to a slowdown over the next year or two.
"For most people, this is not a disaster," said Nigel Gault, an economist with Global Insight, a research firm in Waltham, Mass. "But it's enough to cause them to pull back."
In recent years, many families used their homes as a kind of piggy bank, borrowing against their equity and increasing their spending more rapidly than their income was rising. A recent research paper co-written by the vice chairman of the Federal Reserve said that the rise in home prices was the primary reason that consumer borrowing had soared since 2001.
Now, however, that financial cushion is disappearing for many families. On an inflation-adjusted basis, the national median price —- the level at which half of all homes are more expensive and half are less —- is not likely to return to its 2007 peak for more than a decade, according to Moody's Economy.com, a research firm.
Unless the real estate downturn is much worse than economists are expecting, the declines will not come close to erasing the increases of the last decade. And for many families who do not plan to move, the year-to-year value of their house matters little.
It does, however, contradict the widely held notion that there is no such thing as a nationwide housing slump. A 2004 report jointly written by the top economists at five organizations —- the industry groups for real estate agents, homebuilders and community bankers, as well as Fannie Mae and Freddie Mac, the large government-sponsored backers of home mortgages —- was typical. It said that "there is little possibility of a widespread national decline since there is no national housing market."
In 2005, Ben S. Bernanke, then an adviser to President Bush and now the Fed chairman, said "strong fundamentals" were the main force behind the rise in prices. "We've never had a decline in housing prices on a nationwide basis," he added.
But Global Insight, the research firm, estimates that the home-price index to be released Thursday by the Office of Federal Housing Enterprise Oversight, a regulatory agency, will show a decline of about 1 percent between the first and second quarter of this year. Other forecasters predict that the index will rise slightly in the second quarter before falling later this year.
In all, Global Insight expects a decline of 4 percent, or roughly 10 percent in inflation-adjusted terms, between the peak earlier this year and the projected low point in 2009. In California, prices are expected to decline 16 percent —- or about 20 percent after taking inflation into account.
Since the index began in 1975, it has slipped from one quarter to the next on a few occasions, but it has never fallen over a full year.
Another index dating back to 1950, calculated by Freddie Mac, has also never shown an annual decline. Price data published by the National Association of Realtors, based on the prices of houses sold in a given year, have also never declined. According to the association, the median home price is now about $220,000.
