What's best? Discount pricing, Premium Pricing, or Par pricing?
Sounds boring already, doesn't it?
But I'm going to KISS (keep it simple silly) and then I'll TELL you why at the end.
First, you need to understand there are 3 basic interest rate pricing structures:
Discount Pricing, where you prepay the interest of a loan upfront at closing (discount points). You have thus lowered your interest rate for the life of the loan.
Premium Pricing would be a rate higher than the market requires, allowing the estimated additional monthly interest to be a credit to the borrower at closing. Typically applied to offset mortgage closing costs.
Par Pricing is the exact interest rate set by the market - no discount paid, no premium credited back.
Summary: If you want to lower your closing costs, you can choose a higher interest rate.
If you want to lower your monthly payment, you can pay higher settlement charges.
You want KISS? Skip to the end! If you can handle more, look at this example:
The first option shown is the "par" rate. Take a look at the monthly payment, and the estimated settlement charges.
The middle example is a good option for the borrower who wants lower settlement charges, which is accomplished by increasing the interest rate, and therefore the monthly payment.
And the third example is a good option for the borrower who wants a lower monthly payment. This is accomplished by prepaying interest, called discounting the rate, resulting in paying discount points.
Notice the chart makes it easier for the buyer to identify which option is more appealing to them.
BUT here's where we can crunch it down to determine if the option is BEST for them:
The first option has the borrower bringing almost $2,000 more money to the closing table, to save $76.71 per month. So if you take the extra cost ($2000) and divide it by the savings ($76.71), you get the breakeven or approximately 26 months. That means, if the borrower is going to live in the house more than 26 months, it would be worth the extra $2,000 at closing to get the monthly savings by paying for the lower interest rate.
This should help take the smoke and mirrors out of picking what rate is right for you.
NOW I'm ready to TELL you why I'm sharing this with you...
This chart is on the third page of the new Good Faith Estimate of Closing Costs!
It's not REQUIRED to be filled out, but if you want to best explore your options ask your lender to do so.
Opinions expressed here are the sole responsibility of the author, and do not necessarily reflect the view of Fairway Independent Mortgage.
Ruth Vogt, Sales Manager
#LMB100023827, NMLSR# 257576
Equal Housing Opportunity.
Regulated by the Division of Real Estate.