Do
mortgage
applicants
seeking
lower
interest
rates
end
up
paying
too
much
in
upfront
points?
A
new
statistical
analysis
suggests
that
only
a
small
fraction
of
consumers
who
opt
to
pay
points
hold
onto
their
mortgages
long
enough
to
actually
recoup
the
costs.
In
fact,
according
to
first-of-its-kind
research
by
Penn
State
business
professor
Abdullah
Yavas
and
Yan
Chang,
a
senior
economist
at
mortgage
investor
Freddie
Mac,
home
buyers
who
paid
points
with
their
loans
tended
to
pay
off
their
loans
37.5
months
before
the
"break
even"
point.
"The
average
mortgagor
with
points
ended
up
defaulting,
moving
or
refinancing
more
than
three
years
before"
they
recouped
the
upfront
cash
outlays
on
those
points,
according
to
the
authors.
Yavas
and
Chang
examined
detailed
data
on
3,785
loans
closed
between
1996
and
2003
that
were
funded
or
securitized
by
Freddie
Mac.
Of
the
borrowers
who
paid
points
to
lower
their
rates,
only
1.4
percent
stayed
in
their
mortgages
long
enough
to
financially
justify
the
payments.
Conversely,
of
the
home
buyers
in
the
study
who
chose
not
to
pay
points,
only
1.5
percent
of
them
would
have
been
better
off
by
paying
points
to
lower
their
rates.
Points
represent
lump-sum
upfront
interest
paid
in
advance,
typically
in
connection
with
a
discount
on
the
note
rate
charged
the
borrower.
Though
the
conventional
assumption
in
the
real
estate
industry
is
that
each
point
paid
cuts
a
borrower's
interest
rate
charges
by
0.25
percent,
the
study
documents
that
the
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actual
rate
reduction
was
much
less.
Using
regression
analysis,
Yavas
and
Change
estimated
the
effective
rate
decreases
per
point
at
anywhere
from
0.034
percent
to
0.096
percent.
Equally
significant,
said
the
authors,
"Our
results
also
indicate
that
the
reduction
in
the
interest
rate
is
not
proportional
to
the
increase
in
points."
With
a
lower
rate
impact
than
generally
assumed,
the
break-even
period
for
people
who
paid
points
was
considerably
longer
than
they
may
have
believed
--
or
perhaps
had
been
led
to
believe.
The
authors
note
that
the
period
of
time
covered
by
the
loans
studied
coincided
with
generally
declining
mortgage
interest
rates
and
a
rising
propensity
by
home
owners
to
refinance.
That,
in
turn,
often
vitiated
the
value
of
the
points
they
paid
on
their
mortgages
up
front.
The
time
span
of
the
study
also
coincided
with
the
early
phase
of
the
housing
price
boom,
which
stimulated
record
levels
of
resales
and
purchases.
The
net
effect
was
that
many
people
moved
sooner
than
they
apparently
expected
--
again
eliminating
the
financial
advantage
they
might
have
sought
in
rate
savings
by
paying
substantial
points
up
front.
The
bottom
line
for
home
buyers,
refinancers
and
their
professional
advisers:
Before
sinking
thousands
of
dollars
into
points,
make
absolutely
certain
that
your
rate
and
interest
payment
savings
are
worth
the
upfront
outlay,
especially
given
other
investment
uses
you
might
have
for
that
money.
And
try
to
be
reasonably
certain
that
you'll
stay
in
the
property
long
enough
to
break
even
--
or
better.
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