Does Paying Points On a Mortgage Make Sense?

You’ve found your dream home and are now ready to start shopping for a mortgage. Several lenders have talked about points. Points, also called discount points or origination fees, are each worth one percent of the loan amount. Paying points basically allows the borrower to buy down the interest rate. They are paid to the lender at closing.

You’ve heard that paying points is the only way to get a low interest rate. But is increasing your initial costs worth getting a lower rate?

For most people, paying points doesn’t make sense.

Points became popular in the early 1980s when mortgage rates were in excess of 15%. Most people could not afford the monthly payments that come with such high interest rates. Lenders began offering discounted rates at a certain fee. Sellers often paid the points in order to sell their properties. This gave buyers affordable mortgages and owners were able to sell their homes.

Times are different now. Interest rates are low. There isn’t a large need to pay a lot of money up front in order to get a lower rate.

Let’s look at the numbers. You have contracted to purchase a home for $450,000. You have the 20% down, which leaves you with a mortgage of $360,000.

You find a 30-year fixed rate mortgage at 3.50% with one point. For closing, you will need to pay an additional $3,600 ($360,000 x 1%) for the point.

The lender can also offer you a rate of 3.75% with no points.

What do you choose? The lower rate or the lower closing?

At 3.50% you will have a monthly principal and interest payment of $1,616. At 3.75% your payment increases to $1,667 each month. That’s a difference of $51 per month. If you are looking for a monthly payment reduction, that’s not really a significant one.

It will take you 70 months ($3,600 divided by $51) to recoup your one point payment at closing in the form of a lower monthly payment. This is your payback period. But if you had the $3,600 still, it could be earning interest elsewhere. If it gets 3% interest in another investment, it would earn about $9 per month. If you pay points, this is interest lost, so subtract $9 from your $51 per month savings. Now divide $42 into $3,600, and your payback period increases to 85 months — seven years.

So you have to live in your home for at least seven years in order to take advantage of the savings that paying points gives you. Most people don’t keep a mortgage for seven years.

Whether through sale to  move up or elsewhere or refinance for cash out or lower rates, the average American keeps their mortgage for six years. Unless you are absolutely sure you will live in the home for the time period necessary to recoup your points, you should probably invest your money instead of putting it towards points.

If you are looking at paying points in order to reduce your monthly housing payment, you may want to look at a less expensive property. Fifty one dollars worth of savings isn’t a lot if you are on a tight budget. Chances are that if you have a tight budget to start with, finding extra money for closing would be difficult. And don’t forget, taking out a side loan to get the money to pay points with is defeating the purpose.

My suggestion, don’t pay points unless you’re sure it makes sense for you.

Some Money Saving Mortgage Tips

Buying a house is a great long term investment. If you’ve never had a mortgage payment, it simply means you’ll have to be more careful regarding the management of your finances.

The first step before venturing into a mortgage if you’re not already in one, is to consider your financial situation. Then decide to buy a home where the mortgage and down payments meet your financial situation, so that you can enjoy life and have a roof over your head at the same time. If you have no idea what your monthly budget can afford then you should take some advice from a finance professional first.

Regardless of your situation here are several ways to reduce your monthly mortgage payments:

As interest rates keep on changing you should keep track of changes and consider refinancing at the right time. This will reduce your expenditures. Do the calculations to know your savings after paying closing costs and other expenses. Closing costs can be added to your new mortgage to avoid out of pocket expenditures, while still saving you money.

Check your monthly mortgage statement properly and regularly to make sure that all adjustments are made correctly; even banks sometime they make mistakes.

Choose a mortgage that offers flexibility. You want a mortgage that allows you to pay in an easy way according to your earnings.

Consider biweekly payments or accelerated equity plans. This will give you an additional payment each year and begin to reduce your mortgage quickly right from the start.

Consolidate all your loans into a single one with lower monthly payments. Make a table and analyze all your loans; education, car, home and bank loans for example. Study your expenditures. Try to consult a mortgage specialist, ask him or her about debt consolidation, and how much it can reduce your monthly payments.

Go for a 30 mortgage. This will allow you to pay lower monthly payments, which will lower the amount of interest you pay. Make sure there is no prepayment penalty on your loan, because the best move you can make is to pay way more each payment than the minimum. Each time you do this you’ll be reducing the principle of your mortgage.

A mortgage or home loan is a long term debt but it doesn’t have to be a burden. You are advised to pay it off as soon as possible but arrange your budget tactfully by keeping an eye on insurance, loan disbursements and their interest rates. Enjoy your new home; hopefully with a few of these tips it will be all yours sooner than the banks desire. Remember, if it’s paid for it’s yours.

Top 10 Reasons to Use a Mortgage Broker vs. a Bank Lender

Back in 1987 when I first started in the mortgage business, mortgage brokers were a new phenomenon. Most people who needed a mortgage simply went to their local bank and acquired a “one size fits all” mortgage. Back then, clients would ask me what a mortgage broker does, if it costs more to use us, and what the benefits of using our services were.

Times have changed; approximately half of all mortgages are no longer being originated by bank lenders. Depending on the type of home loan you are seeking, you could save yourself thousands of dollars by shopping various lenders for your home mortgage needs. Therefore it is imperative that you know the difference between a mortgage broker and a bank lender.

Below are the Top 10 reasons why you should use a mortgage broker instead of a bank:

1. Mortgage brokers specialize in home loans and are commission based, so it is in their best interest to get you the best rate possible, or they don’t get paid.

2. Mortgage brokers have an exceptionally large network of lenders that they work with to get you the most favorable mortgage rates and terms. Put it this way, the more lenders you have competing for your home loan, the more you save.

3. Mortgage brokers are able to work one-on-one with each individual client, evaluate their specific needs and find a lender that suits them personally. Next, the broker submits the request to one or more lenders, and when the request is accepted the broker works closely with the lender until the home loan closes.

4. They can often times find a lender who accepts home loans that the bank foregoes. Mortgage brokers are also able to discuss a lower interest rate from lenders in trade for bringing in business.

5. Mortgage brokers save you the groundwork of finding the best mortgage rate and terms for your specific needs.

6. Banks on the other hand deal with all types of loans, and may not have the specialization in home loans that a mortgage broker has.

7. Bank loan officers process mortgage loans originated by only their employer.

8. Loan officers at a bank are often limited to certain home loan products, guiding principles and criteria that they must follow. This can limit the home loans available to you.

9. Regardless if you choose to have your home loan with that particular loan officer or not, they are still getting paid a salary. With this in mind they may not be looking out for your best interest.

10. In most cases, you not only will not pay more for your mortgage using a mortgage broker, but instead will pay less.

If you are ready to finally purchase your dream home or to refinance, give yourself an edge, and use a mortgage broker like us to to get you the best deal possible at the lowest possible rate and cost.

The APR When Shopping For a Mortgage, Not Always the Best Way to Shop

There are two different rates we’ve always been told to look for when shopping for a mortgage. The first is the Mortgage Interest Rate, which is the rate of interest that will determine your monthly payment. The second is the Annual Percentage Rate, more commonly referred to as the APR.

Many people have come to believe that a loan’s APR, is the single most important factor in comparing mortgage loans. However, this is rarely the case, especially in today’s marketplace,” explains Bob Peckenpaugh, Manager of CFIC Home Mortgage. Analyzing the APR during mortgage refinancing or second mortgage loan shopping can be a very tricky proposition.

The Annual Percentage Rate is defined as “the cost of consumer credit as a percentage spread out over the term of the loan.” Most consumers have no idea what makes up this elusive number. The APR is a valuable tool in comparing various mortgage loan programs, but it should never be relied upon as the sole determining factor in choosing a loan, for the following reasons:

1) Not all closing costs are calculated within the APR uniformly. According to Peckenpaugh, “There is a huge variance among lenders, mortgage loan officers, and even states on which fees they include in their APR when calculating the loan. There is no standard among the mortgage industry, let alone among competing mortgage companies.”

2) The costs themselves can be manipulated within the loan. For example, prepaid interest (the amount of pro-rated interest a consumer pays at closing for interest which will be earned from that date until the end of the month) can be represented as anywhere from 1 to 30 days, a potentially huge difference, especially on larger mortgage refinancing loans.

3) Manipulation of the title fees. Ordinarily, the title company’s settlement or closing fee is an APR fee, while their title insurance cost is not. Peckenpaugh explains, “recently, in order to minimize the effect to the APR, title companies began simply decreasing their closing fee, while subsequently increasing their title insurance fee by the same amount, thereby reducing the APR.”

4) Lack of industry awareness of what is accurate. Most mortgage loan or refinancing officers do not intentionally try to mislead, but inaccurate information could result in the consumer making a poor decision.

As opposed to APR, consumers would be better served by asking the following simple questions.

1) What is the mortgage interest rate?
2) What is the total mortgage loan amount?
3) What is the monthly mortgage payment (principal and interest)?
4) How much are the closing costs?

Under new guidelines issued in 2015, within three days of applying for a mortgage, the borrower will receive a Loan Estimate Form that discloses all of the estimated costs of the loan, including taxes and insurance.

If you have any questions about anything written here, feel free to contavt me, I will be happy to clarify things for you.

Avoiding Mortgage Mistakes That Can Cost You Money

If you are planning to obtain a mortgage, then you should make sure that you avoid a number of common mistakes that will leave you paying too much money or getting into financial difficulties. If you are aware of potential mortgage mistakes that can cost you money, you will be better equipped to get the best deal for your needs.

Here are the most common mortgage mistakes that can cost you money, and how to avoid them:

Not sorting out your finances

If you try to obtain a mortgage before you have sorted your finances out, you could find yourself getting a rough deal or even being rejected. Before looking at mortgages, get all of your finances in order and have all your paperwork ready to submit to mortgage lenders. Also, obtain a free copy of your credit report and make sure that all the information on it is correct. If there are mistakes on your credit report, it could harm your chances of getting a good mortgage.

Looking for a house without being pre-qualified

Many people make the mistake of looking at property without having any idea whether they can secure a mortgage to pay for it. Pre-qualification is an initial estimation of how much you can borrow based on your income, assets, credit and debt. It relies on the undocumented information you give to your mortgage broker or lender, along with a copy of your credit report. It is very helpful when shopping for a home. A full application would include the documentation needed to back up the information.

Borrowing too much

Perhaps the biggest mistake people make is to borrow too much money. This can come about through a combination of not being honest with yourself and pressure from lenders. If you are not honest with yourself about how much you can afford then you will end up in financial difficulty. You shouldn’t be tempted by lenders who offer you overly generous mortgages because it is you who will pay the price if you cannot keep up with the payments. Work out how much you can comfortably afford to pay each month and stick to this budget.

Not shopping around

If you want a good deal you have to shop around. If you find a good deal, you shouldn’t automatically think it is the best deal you can get. Many companies offer amazing deals that turn out to be a lot more expensive than initially advertised. Do your research and find out what someone with your credit rating should be paying on average for a mortgage. If you do this then you will end up with a much better price.

Paying for things you don’t need

There are many unnecessary closing costs and junk fees that some brokers and lenders add. Don’t be ripped off by hundreds or even thousands of dollars in extra fees. Check out our Mortgage Saver Program, and don’t pay these unnecessary fees.

Do The Right Math: Compare Mortgage Quotes Accurately

It doesn’t matter how many times you trawl the internet for information. When looking for tips on taking out a mortgage, you will always be given this advice: compare mortgage quotes.

This is the first and most important rule for would-be homeowners. Always compare mortgage quotes. Unless you do, you cannot distinguish the good offer from the bad. Only when you compare mortgage quotes can you assure yourself that you are getting the best possible deal there is.

Comparing mortgage quotes, however, is not as simple as pitting one figure against another. You have to factor in other things too. At the same time, you need to have at least a working knowledge of the mortgage terms and realities you will be dealing with.

Tips for Comparing Mortgage Quotes

Below are some tips to ensure that your comparison yields as precise a result as possible:

1. If you want to make comparisons using very accurate data, get quotes from different lenders or brokers on the same day. Mortgage quotes change daily. At times, they even change several times in one day. If you compare a rate you got from one lender on Tuesday to one you got from someone else on Thursday, and rates increased from Tuesday to Thursday, the second lender looks like the better lender, but that may not be the case.

2. When you compare terms, compare mortgage quotes for similar lock periods. A lock period is the specific span of time that guarantees implementation of a certain rate. As a rule of thumb, longer lock periods have higher rates. Lock periods are generally offered in increments of 15, 30, 45 or 60 days.

3. Compare mortgage quotes that have the same points, such as zero or one. In the mortgage business, a point is one percent of the loan amount paid at closing, or with most refinances, added to the loan amount. Three points, for example, means three percent of the loan amount.

4. You should be aware that mortgage quotes follow a tiered pricing. This gives you the opportunity to buy the rate and bring it up or down. How? It’s very simple. To make the points decrease, increase the mortgage rate. To make the points increase, reduce the rate. I only quote zero point loans for my clients, however, there is always an option to pay points and buy down the rate.

5. In the quote you ask for, ask that the quote be separated from standard closing costs to close a loan in your state. Property taxes, home insurance, title charges, appraisal costs, escrows for tax and insurance and prepaid interest are not lender fees. What falls under lender fees are application, processing and underwriting fees. I am happy to say that we don’t charge any of those fees.
Things to Watch Out For When Comparing Mortgage Quotes

1. Locks of 45 days or more have a higher rate.

2. If lenders are asking you to pay points on the loan, be sure to have them quote the points in dollars. This is for your protection. Unscrupulous lenders might later on change the base amount to collect more from you. This is because points are computed as percentages. The bigger the base, the higher the commission, for example.

3. Beware of lenders that are not upfront about the loan process to you. A trustworthy mortgage company is always willing to answer your questions and explain points of misunderstanding.

Comparison is good because it highlights the defects of one and showcases the suitability of another. All the reputable websites that dispense mortgage tips will always tell you to compare mortgage quotes.

Beyond rates: What the banks won’t tell you about choosing the best mortgage

Choosing the best mortgage from all the available lenders out there can be complicated. There are so many terms, features, restrictions and potential penalties to keep in mind. But at least mortgage rates are easy to compare—all you have to do is choose the lowest one, right?

Think again! Choosing the lowest rate is only straightforward if all the rates are stated the same way and include the same things. Fortunately, lenders are required to use the Annual Percentage Rate (APR) as their posted rate. So on lender websites, ads and window posters, the rate that’s quoted should be APR.

The Annual Percentage Rate is a compound rate, so it’s applied to original principal plus accumulated interest. This gives you a more accurate picture of the actual cost of the loan. To make the APR even more realistic, it not only includes all the interest costs of your loan, it also includes non-interest costs that lenders charge. Depending on the lender, this can include appraisal fees, closing costs, loan fees, loan origination fees, mortgage default insurance, creditor life insurance, legal fees and more. It’s that “depending on the lender” part you have to watch. The only way to accurately compare APRs is to look into each lender’s fine print and see what’s included in the rate it’s quoting.

Or, you could take the easier, faster, less frustrating route, and simply call me! As a Licensed NYS MLO, I have access to more lenders than you could possibly find on your own, and I fully understand all their products, terms and rates. I don’t usually advertise myself on blog posts, but I’d be happy to do a no-charge analysis of your needs, and then discuss which options work best for you. And I’ll make sure you don’t get fooled by a really low mortgage rate that could actually cost you more in the long run because of all the restrictions and penalties it includes.

Anatomy of a Mortgage

In exchange for getting this very large loan, the person then agrees to put the house up as collateral against the loan

Introduction

Mortgages were the original home loan agreement. In many ways, the mortgage changed the real estate market completely and turned it on its head in a very good way. Before the advent of the mortgage, the only way for people to go out and get what they wanted in terms of property was to pay for it outright. Since very few people possessed the means back then to pay for property outright, the ownership rights were only there for pretty much the upper middle class. From the middle class downwards, most were excluded from home ownership. Mortgages changed all of that, and to understand how profound a mortgage is, it is important to take a close look at exactly what a mortgage entails.

Agreement

The agreement for a mortgage is one that is the main point of everything else that follows. Under the agreement of a typical mortgage, the person has the ability to borrow money from a lender in order to pay for a house or a property. The amount of money they can borrow varies, but for a Conventional Mortgage, the maximum you can borrow is 80% of the lower of the appraised value or purchase price of the house. Options for mortgages above 80% are available by paying mortgage insurance, which I will discuss in another blog. In exchange for getting this very large loan, the person then agrees to put the house up as collateral against the loan, so that the bank has some way to save itself in the event that the person is unable to pay the loan back.

Interest Rates

Whenever people think about loans, very likely the first thing that they think about is interest rates. There are a number of different interest rates involved in different loans, but when you compare the vast majority of them to what is available under a mortgage, what you find is that the vast majority of those interest rates don’t really match up. The average mortgage has an interest rate attached to it of between 4% and 5% (depending on the loan to value and credit score) and the vast majority of loans that are available on the marketplace today, even if they happen to be secured loans, really can’t match up.

Repayment Terms

Just like with interest rates, the repayment terms for a number of different mortgages are very impressive when compared to a number of other conventional loans. When you’re talking about unsecured loans (i.e. credit cards), then obviously there’s going to be no comparison, but for the most part you will find that mortgage repayment terms are significantly easier to deal with than with most other loans. This is because (a) the collateral being used is extremely strong and (b) the term lengths are longer, so naturally that makes the monthly payments smaller.

Fees

There are some fees for mortgage payments relating to things like late payments and underpayments, but you will find for the most part that fees are not really that important in the grand scheme of the agreement itself. It is important to be aware of what the fees are, and to make sure to pay your mortgage back on time every month.

Closing Costs

Closing costs for a home mortgage can be significant. With the advent of the new disclosure laws that have taken effect in 2015, all fees must be disclosed by your lender at the beginning of the loan process. These fees include appraisal costs, title fees, recording and lender fees. Make sure you receive a lender disclosure at the very beginning of the process.

 

Basic Mortgage Terms You Should Know When Buying a House

Understanding these terms will allow you to avoid many of the pitfalls that exist in the real estate market

Educating yourself on the various mortgage terms you will run into will help you make better decisions when deciding which home you want to purchase. When you sign a mortgage contract, your home is used for collateral and it is your responsibility to make sure your payments are made on time each month.

The first term you should know is principal. The principal is basically defined as the amount of money you borrow for your home. Before the principal is provided you will need to make a down payment. A down payment is the percentage you will put towards the principal. The amount of the down payment will often depend on the cost of the home. Once you pay off the principal, the home is yours.

The next term you will need to know is interest. Interest is a percentage that you are charged to borrow a certain amount of money. Along with the interest rate, lenders may also charge you points. A point is a portion of the total funds financed. The principal and interest makes up the majority of your monthly payments, and this is a method that is called amortization. Amortization is the method by which your loan is reduced over a given period of time. Your payments for the first few years will cover the interest, while payments made later will be applied towards the principal.

A portion of your mortgage payments can be placed in an escrow account in order to go towards insurance, taxes, or other expenses. The next term you will hear a lot is taxes. Taxes are the amount of money that you have to pay to your state or government. When it comes to your home, these are known as property taxes. These taxes are used to build roads, schools, and other public projects. All homeowners must pay property taxes.

Insurance is another important term that you will hear in the real estate community. You will not be allowed to close on your mortgage if you don’t have insurance for your home. Home insurance covers your home against floods, fire, theft, or other problems. Unless you can afford to repair your home if it is damaged, it is usually a good idea to get insurance for your home. If your home is located within a zone that is known for having floods, federal laws may require you to have flood insurance.

If the down payment you put towards your home is less than 20% of the total value, you will often be charged additional premiums on your insurance by the lender. This is done to protect you in the event that you default on your loans and fail to make payments. Without this, many people would not be able to afford a house.

These are the basic terms you will need to know before your purchase a home. Understanding these terms will allow you to avoid many of the pitfalls that exist in the real estate market. You want an interest rate that is low, and you should always try to get a fixed interest rate if possible. This will allow you to focus your income on making payments towards the principal, and this will help you pay off the loan faster. A mortgage is an important part of your financial picture, and you want to make sure you pick a home that you can afford. If you fail to make your payments, you may lose your house.