Borrowers seldom score by paying points |
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That might sound like a slam-dunk case against paying
points. It's not, because mortgage rates were falling and home values
were rising during much of the study period, creating many opportunities
to refinance.
"Personally, I think that it is a caveat of this study that
it covers a period typified by historically low mortgage rates and
increasing house prices, which offers borrowers more incentive to
refinance than times of rising interest rates, where more borrowers
might reap the full benefits of mortgage points," Chang says
in an e-mail interview.
Would the result have been different in a period of rising rates? "That we simply do not know," Yavas says in an e-mail interview while on sabbatical in Turkey.
Lenders weigh in
Bob Moulton, president of Long Island-based Americana Mortgage, says the results probably would have been different in a time of rising rates. He says a greater percentage of people would have held onto their mortgages past the break-even point if rates had been rising, instead of mostly falling, during the study period.
But even when rates are generally on the way up, they sometimes fall, at least briefly. "If you look at how interest rates fluctuate over time, a quarter of a percent is not unusual," says Steve Habetz, owner of Threshold Mortgage in Westport, Conn.
"Take a look at any graph of interest rates for any four-year period, and unless you're a market-timing genius, you're not going to benefit by paying points," Habetz says.
Bob Walters, chief economist for Livonia, Mich.-based Quicken
Loans, notes that the researchers looked only at fixed-rate loans.
He says the break-even period is shorter on adjustable-rate mortgages
-- typically, one discount point reduces the interest rate by half
a percentage point instead of one-quarter of a percentage point.
Bill Lyons, president of San Diego-based LEI Financial,
says a lot of people would benefit from making an extra payment
every year rather than paying discount points.
Description, not prescription
Chang stresses that she's describing how people act, not prescribing what they should do. She says her paper makes the point that "the decision process of the borrowers is more complicated than our model can capture."
"What we could measure," she adds, "and what the economic theories use as the basis of analysis, are the monetary incentives -- gains or losses in dollar terms -- but what we can't observe are the hidden motives: Some borrowers may consider time spent entertaining their families is more valuable than watching the rise and fall of the rates, and therefore choose to pay points because they wish to lock in on a low rate so they don't have to spend time watching out for refi opportunities."
Bottom line: "Borrowers make the choice based on their own needs and expectations, and in many cases paying points works in their favor." Even if that can't be measured solely in dollars and cents.
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