Paying points can yield jumbo savings


When it comes to home equity lines of credit, or HELOC’s, millions of Americans don’t realize that they are paying interest only and accepting a monthly floating interest rate on top of that for the first 10 years (with the option to pay principal).

Yet, when it comes to any possible merit for an interest-only first trust deed locked in for the first 10 years of a 30-year loan, for example, a typical reaction is that these are the same old predatory lending practices of yesteryear.

That’s nonsense.

When you borrow for a home loan all you are doing is renting money, amortized or not. Best practices should be to focus on the lowest rental cost of the mortgage. And, you can always add principal to your monthly interest-only payment as prepayment penalties are long gone.

As luck would have it – thanks to Brexit and a bastion of countries using negative interest rates – there is an abundance of really cheap mortgage money to be had for the likes of us Orange County homeowners with humongous home loans.

We’re talking 2.625 percent interest-only locked in for 10 long years. On a million dollars, that’s a payment of $2,187. The amortized payment for that is a comparatively low $4,016.

What’s the catch? You are paying 3.5 points – that is, paying 3.5 percent of the loan amount – to buy that rate down to 2.625 percent.

In this case, paying points offers more long-term savings.

Take the same $1 million interest-only loan at 3.75 percent with zero points. That payment is $3,125 or $938 per month higher than the loan at 2.625 percent.

It takes under three years to recoup the points ($35,000 in points divided by $938 in payment savings).

For a cherry on top, the points are tax deductible. You are saving about $79,000 in interest payments over the first 10 years by paying points.

Compared to an equivalently priced jumbo 30-year fixed where you are paying 3.5 points, you’ll receive a rate of about 3.375 percent and an amortizing payment of $4,421.

The savings on an interest-only loan can be $405 per month – or $48,600 in the first 10 years – compared to the fixed if you make additional payments to pay down the loan.

While the fixed-rate loan guarantees the rate for the 30 years, do not assume the 10-year adjustable rate will automatically be higher after the interest only period ends. We just don’t know.

And, over the last 10 years, those adjusting ARMs have stayed in the same zone and oftentimes gone lower than the locked period.

Seeing is believing. One of my clients paid a point five years ago and bought his rate down to 3 percent on a 5/1 interest only – that is, fixed for five years, then adjusting annually each year thereafter. He made a boatload of money in the stock market with his extra cash flow.

Now he’s back to do the 10/1 interest only ARM.

If you have better uses for your money or you are paid irregularly (contractors, entertainment industry and realty agents, for example), this might fit.

This loan is a non-qualified mortgage, meaning that mortgage regulators require a much higher bar (more down payment or equity in the event of a refinance, higher income, additional cash reserves and higher credit scores) for lenders to provide this type of product.

If you have questions or comments, please contact Jeff Lazerson by clicking here.

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Jeff Lazerson - Mortgage Columnist since 2011