We will pick the lender at the top, Freedom Mortgage, who this morning had the best price for this rate. Now another thing to know about interest rates is that every single lender changes their rates every single day. So, this morning Freedom Mortgage was at the top, at four and a half percent, but tomorrow it could be any number of the seventy five lenders we work with. Just because freedom was the best price at four and a half percent, doesn’t mean that they were the best price at four and a quarter percent or a four and three-quarters percent.

It could have been another lender altogether. This chart shows the pricing for all of the rates offered by freedom mortgage. This morning, ranging from four percent up to five and three-quarters percent. For the sake of our discussion, we’re gonna pick the ones at four and a quarter, four and a half, and four and three quarters. Now another term that I needed to define is discount points. You’ll hear that: discount fee, discount cost, discount points; it’s all the same thing. It’s basically the money the price that the lender charges for a specific interest rate, usually expressed as a percentage of the loan amount or a flat dollar amount.

Now, it also can be expressed as a negative number, a negative discount point, or a lender credit. So the way that would work is that at a really low interest rate you’d have to pay something, a discount point or a discount fee – and then at a higher interest rate the lender will actually give you money back, that you can usually use as a credit for closing costs. So the question is what is the better way to go? And the answer is: “It depends.” This chart shows the interest rate, the discount costs, the dollar costs, and the monthly payment on a six hundred and seventy nine thousand six hundred and fifty dollar loan at four and a quarter percent.

The discount fee is one point two to four percent of a loan amount, or eighty three hundred and eighteen dollars and ninety two cents, and the monthly payment at four and a quarter is three thousand three hundred and forty three dollars. At four-and-a-half there’s a very slight credit of 0.116 percent , which is seven hundred eighty eight dollars and thirty nine cents ,the monthly payment at four and a half percent is a hundred dollars higher at $3,343. At four and three-quarters percent ,it’s a larger credit of 1.174 percent of the loan amount which amounts to a lender credit of seventy nine hundred and seventy nine dollars and nine cents and for that the payment is a hundred and two dollars a month higher.

Now for this discussion, I’m using the maximum Fannie Mae Freddie Mac loan amount in Orange County of six hundred and seventy nine thousand six hundred and fifty dollars. The mathematics and the percentages and the payments work out exactly the same, comparing whether it’s a hundred and seventy nine thousand dollar mortgage, a million seventy nine thousand dollar mortgage, or a five million seventy nine thousand dollar mortgage. So, keep that in mind, that whatever comparison and discussion we have, it’s the same for any loan amount that you get. At four and a quarter percent versus four and a half percent, it’s a hundred dollar difference in payment, but at four and a quarter percent. You have a little over eighty three hundred dollars in costs whereas at four and a half you get a lender credit of seven hundred and eighty-eight dollars; a total of ninety one hundred dollars difference in cost. Well, if you take that ninety one hundred dollars and divide it by the hundred dollar-a-month difference in payment, it takes ninety one months to get that payback.

In other words if you paid ninety one hundred dollars out of your pocket to drop the interest rate from four and a half down to four and a quarter, $9,100, that hundred dollars a month in monthly payment that you would save would take you ninety one months before you broke even. Meaning it’s not until you’re 90 second month that you would actually start to make money. Now let’s compare the payback period for four and a half versus four and three quarters percent, which was a hundred and two dollar difference in monthly payment. At four and a half, there’s a 788 dollar and change credit; at four in three quarters it’s just over seventy nine hundred and seventy nine dollars. Again if you take the difference, which is seventy one hundred ninety dollars and divide that by a hundred and two dollars and monthly payment savings, it’s a 70 and a half month payback.

In other words, if you took the seventy one hundred dollars from the lender and went from four and a half up to four and three quarters, you’d be saving money at a rate of a hundred and two dollars a month for 70 and a half months. That’s almost seven years of savings. It’s not until after that that the monthly payment wipes out all the gains that you had up front.