McLean resident Stacy Stacey and her husband recently refinanced their home mortgage for the second time in two years.
On the first try, in July 2001, "We got a 7 percent mortgage, which was a jumbo. No principal. It was an interest-only balloon. It cut our interest payment by about $800 to $900 per month," she recalled.
The couple thought that the deal was "as good as it could get," she said.
They were wrong. Their latest refinancing gave them a 30-year, fixed-rate loan at 6.125 percent, with no origination fees and no points.
"None of our transactions had any points," Stacey said.
Increasingly, that is the case for many home buyers and homeowners who are jumping on the near-record-low mortgages that have been available for the past several months. "The most popular loans have been zero-point loans," said Mark Cohen, chairman of Cohen Financial Group Inc. in California.
Points are upfront lump-sum payments made when taking out a mortgage. One point equals 1 percent of the amount of the mortgage; generally, points translate to lower interest rates for the long term.
Before the 1990s, almost everyone paid points with a mortgage. Now, that has changed. According to Freddie Mac, the average loan carried 0.6 points last year, compared with 2.1 points in 1990. There are a number of reasons behind this home-financing trend:
First, the financials. Rates on adjustable and fixed mortgages are the lowest they have been in decades. This week, rates on one-year, adjustable loans averaged 4.03 percent; 15-year, fixed-rate loans averaged 5.36 percent; and 30-year, fixed-rate loans averaged 5.97 percent, Freddie Mac said. That compares with 6.83 percent a year ago on a 30-year loan. All these rates assume the borrowers pay some points -- 0.6 on average.
With rates already this low, many borrowers see no need to pay upfront points to bring the rate down further.
A high proportion of today's borrowers already have experience with the mortgage process; about 78 percent of loans originated this week were refinances, the Mortgage Bankers Association of America said.
"Most of the people that we've been dealing with really kind of understand the options that are available in terms of points," said Randall C. Johnson, president and chief executive of Market Street Mortgage in Clearwater, Fla.
Johnson said that 80 percent of his customers do not pay points, although half of those people do pay origination fees. While the lending industry makes a distinction between origination fees and discount points, to the IRS they're all points.
Another factor fueling this financing trend, mortgage bankers say, is the increased mobility of Americans. Homeowners such as Stacey realize that they may not be in their abode for more than a few years.
Using points to reduce interest rates is generally a good strategy for homeowners only when they are planning to stay in their home or with that mortgage for at least five years. "If somebody says to us that 'this is really a starter home, we're really not going to be here more than three to five years,' we would really never recommend that they pay points," said Michael Bizenov, president of Sterling National Mortgage Co., a subsidiary of New York-based Sterling National Bank.
The reason is simple: It usually will take about four years to recoup the costs of the points. "Every year you stay after year four, you've now gotten a break," Bizenov said.
The same logic applies to homeowners who are refinancing their existing mortgages.
"You don't need to lay out cash to buy it down," Bizenov said. "Unless you're in that situation where your monthly payment is a concern, we generally recommend a zero-point option. Let's keep the closing costs low."
Another reason people eschew points is that, over the past several years, there have been a number of times when falling rates made refinancing attractive. So even if someone plans to stay in a house forever, they may want to refinance mortgages more frequently.
"Every four years there has been a refinance boom, so to speak -- 1990, 1994, 1998 and in 2002. But never before has the boom been this potent," Cohen said. "This one has been unprecedented since the rates have dropped so much. It's volatile."
There are some circumstances where people still opt to pay points. For instance, home purchasers may choose the lowest possible monthly rate so that they can get approved for a bigger mortgage, even if that involves paying more upfront.
People who are refinancing to take out cash to pay other bills may also want to weigh whether to pay points. The fees come out of the money the borrower would otherwise take away from the closing table, and the monthly payments are less. Again, it takes several years before the savings balance out the upfront cost.
Bizenov said that people who are in that situation should consult with their accountant or other financial advisers to determine what makes the most sense for them.