Purchasing/Refinancing a home now: buy with Negative Point

With the interest rates sky high, nearly highest in 2 decades, you might be deterred from entering into the housing market or to even thinking about refinancing in this market. But you do have an, often overlooked tool, to your rescue, **Negative Points**.

Sample Negative Points rates from Digital Frederal Credit Union

Sample Negative Points rates from Bank-Fund Staff Credit Union

Most of us know about the points. You pay extra closing costs to your lender so that they can lower your interest rates. But the reverse is also true, for at least some of the lenders, where they pay you money but instead of lowering the interest rate, they raise the interest rate.

Let’s take an example. Suppose you wanted to buy (or refinance) a property which costs $500,000. You pay a standard 20% down and take a loan for the remaining $400,000. You approach a lender, and they show you a rate of 6% for a standard 30 years fixed. Now, in the points system, the lender might also give you the option to bring down your rate from 6% to say 5.75% if you pay 1% points. In other words, you would pay $4000 more in closing costs and your interest rates drop from 6% to 5.75%.

Now, if your lender also permits negative points, then what might happen is that your lender will pay you $4000 in closing, but in return your interests might go up, from 6% to say 6.25%.

You might ask, why would anyone do that? You would do it in the current market where the interest rate is already sky high and is likely to go down. In other words, you aren’t likely to stay with this loan for long anyways and will seek refinancing soon. So even if you pay a higher interest rate now for a few months, you will come out ahead as you are going to refinance anyway. Again, taking the above example, a 6% interest rate your monthly mortgage will be $2,398. With 6.25% your monthly mortgage will go up to be $2,463 i.e. $65/month increase. But as your bank is giving you 1% credit i.e. $4000 upfront, you will still be ahead if you refinance your loan any time before next 61 months ($4000/$65). With the federal Reserve already on the path to cut interest rates, refinancing again soon becomes a very likely scenario.

One side note: very similar to points vs negative points, as the interests’ rates slides, Fixed Rates don’t make sense in today’s market. As you are more likely to refinance in near future anyways, why will you pay extra interest for a Fixed Rate and not opt for a lower rate ARM rate. So, If your loan officers are selling you a Fixed rate (as they make more commission on Fixed vs the ARM loans), run away from them.