Mortgage Points and 203k Loans: What You Need to Know
If you decide to take out a 203k loan, but you don’t like the interest rate, can you buy discount points in order to reduce it? The answer is yes. Just like for other kinds of FHA loans, most lenders will allow borrowers to purchase a certain number of mortgage points. A mortgage point allows the borrower to pay an upfront fee in order to lower their interest rate. In most cases, one mortgage point costs 1% of the total loan amount, and will typically lower a borrower’s interest rate between one-eighth and one-quarter of a percent.
Should I Purchase Mortgage Points on my 203k Loan?
That completely depends on your individual situation and goals. In particular, it depends on two major factors: how long you plan to stay in the home, and how much money you have to put down during closing. If you plan to stay in the home for many years, and you’re not worried about coughing up a little extra cash during closing, then buying a discount point or two might be a good idea.
However, if you think you’ll want to sell the home in a few years, and you don’t have much cash to contribute to your closing, you’ll probably want to stay away. Since mortgage points reduce your monthly interest payments, it will likely take more than a few years for you to recoup your costs. If you really want to make an informed decision, however, you should do the math yourself.
For example, if you were to take out a 30-year fixed-rate mortgage for $300,000 with a 5.0% interest rate, your monthly payment would be $1610.46. However, if you purchased a discount point for $3,000 that lowered your interest rate by 0.25%, you would pay monthly payments of $1,564.94, saving $45.52 per month. In this case, it would take 65 months, or 5 years and 5 months, in order for you to recoup your expenses.
Sellers are Permitted to Pay Mortgage Points on FHA Loans
If you don’t want to put up the cash to pay for mortgage points during closing, you might want to try to convince the seller to do so. The FHA allows sellers to pay up to 6% of the property’s sale price towards the buyer’s closing costs. While an ordinary seller may not be keen to pay your closing costs, if a seller is in a hurry to close, they may be willing to do whatever it takes to speed up the process.