On The Beat 9/9/20 - JTS & Co.

Today on On The Beat, Jeff Farnham from JTS & Company Mortgage Professionals joins us to tell us all about discount points.

Midday slate troy thompson: welcome to on the beat, everyone.

I'm troy thompson.

Joining me in the studio today is jeff farnham of jts & company mortgage professionals, and today we're talking all about, what are discount points?

Troy thompson: welcome to the show, my friend.

Jeff farnham: yeah.

Good morning.

Troy thompson: how are you?

Jeff farnham: i'm well.

Troy thompson: nice to see you in person.

I hope you and the family are well.

Jeff farnham: we are.

Everybody's doing great.

Troy thompson: okay.

Well, let's talk about why are some being quoted different rates by different lenders?

Jeff farnham: okay.

Interest rate's a very interesting topic, and a lot of people, that's what they hang their hat on and want the lowest interest rates.

Mortgage markets, bond markets are in constant flux.

They're always moving.

So you may get a quoted rate this morning, call us this afternoon and the market's moved negatively or positively and get a different rate.

So unless you're checking your interest rate with different lenders at exactly the same moment in time, or at least within a reasonable amount of time of that quote, you can end up with different factors and different facets.

And on top of that, different companies have different pricing models in the way that they retail their rates out.

Troy thompson: okay.

Well, let's just break it down.

What are actual points?

Jeff farnham: discount points is a tool that can be used.

We talk in terms of a par rate.

Your rate today is x, and if you want to, "well, i want a lower rate than that."

Well, you can pay a discount point to try to buy that rate down.

A discount point, in easy terms is 1% of the loan amount, but it could be some multiple of that.

It could be a half percent or a quarter percent or something like that.

But most people think if they pay one discount point, they're going to lower that rate by 1%.

That's not true.

One discount point may only move the rate a quarter point or a half point, or maybe an eighth of a point, depending on what bond yields are doing that day.

Troy thompson: are discount points bad?

Jeff farnham: well, they're not necessarily bad, but you have to be very careful.

One of the things we see a lot of times with like some of the national lenders, they call and they quote the lowest rate and it's loaded down with points.

We looked at one the other day that it was going to take the borrower over 10 years to recoup the cost of those discount points.

It didn't make sense for them to do that when they could take a rate a quarter point higher.

They were only planning on being in the home four or five years, right, and then they were planning to move beyond that.

They would never make up the cost of that discount point.

So discount points in and of itself are not bad.

They just got to be applied correctly.

Troy thompson: are discount points necessary for your mortgage?

Jeff farnham: they're not necessary.

No.

In fact, when we quote a rate, most times we're quoting without any discount points.

But we'll also, if the borrower wants a lower right, then we can offer them that with a discount point.

Again, you have to evaluate.

You got to do the math.

Does it make sense to pay that point?

Troy thompson: is this coming knowledge because i've never heard of discounted points?

Jeff farnham: well, it's out there.

In our industry and in our circles, yes, it's very common.

To the general public, no, it's not so much.

Most of the time what we see is people that are paying discount points never really understood what they were paying.

They got a package in the mail.

They got it by email from whomever they're working with and didn't really understand what the cost of that loan was.

Troy thompson: to me, with what you just explained to me, is it worth doing it?

Jeff farnham: it's worth looking into, right?

And then you have to, based on your situation and what your plans and your goals and what your timelines are, you have to find out does it make sense.

In general terms, just as kind of a baseline, if i can't recover those discount points in a couple of years, it's probably not worth doing.

Troy thompson: i want to ask you a question, because there's fixed rates and then there's variable rates.

What do you recommend for people?

Jeff farnham: well, right now, with the way rates are, there's no reason to do an adjustable rate mortgage, right?

When mortgage rates were 7 or 8%, and you could get rates were 7 or 8%, and you could get an adjustable rate in the fives and you were going to be here for three years.

Let's say i'm military guy moving in and out, was going to be here for three years, and you did a five-year fixed at 5.5, that might make sense.

Troy thompson: right.

Jeff farnham: but in today's market, when you're getting rates in the threes and twos, there's really no bottom to get a lower adjustable rate.

In fact, some of the yields on the adjusted rates are actually higher than we're seeing on some of the fixed rates.

So it just doesn't make sense to do anything beyond a fixed rate right now.

Troy thompson: behind the scenes, why are the rates so low?

Because it sounds like cheap money.

Jeff farnham: well, it's almost free money.

It's a function of what's going on in the marketplace, holding rates down.

We came out of a very strong economy.

Things were doing well, went into the pandemic and it's a way of stimulating the economy.

Then the way the bond market's reacting and the stock market's reacting, it's just we're holding rates down.

Troy thompson: very quickly.

Do you see it staying this way for six months, 12 months?

Jeff farnham: some are speculating for the next 18 months we'll see rates in these low territories.

Troy thompson: so, lock them down.

Jeff farnham: yeah.

Troy thompson: that's what you're saying.

Jeff farnham: it's a really good time.

We got a lot of people refinancing right now, moving from even 3.5 into the twos.

Troy thompson: wow.

Amazing.

Jeff farnham: big savings.

Yep.

Troy thompson: thanks, jeff.

Jeff farnham: yep.

Troy thompson: we appreciate you.

Jeff farnham: yep.

Troy thompson: if you want to find out more information, there it all is up on the screen.

Jeff farnham of jts & company mortgage professionals.

Give them a call.

They're going to take care of all your