Should I “buy down” the
rate (pay discount points)?
Buying down the rate refers to the payment of
discount points in exchange for a lower interest
rate. A discount point is one percent of the
loan. Hence paying two discount points on a
$100,000 loan requires $2,000. There is a simple
and more complex method of determining whether
or not to buy down the rate.
The simple approach to the question of
whether or not you should pay discount points
requires a basic mathematical calculation.
Divide the difference of the cost of discount
points on two loans by the difference in the
payment. If you'll be keeping the loan longer
than the number of months indicated, the payment
of the discount points is mathematically
warranted.
For example, on a $100,000 loan, if your
alternatives are taking an 8.375% rate at zero
points, or an 8.125% rate at one point, this
calculation tells you:
By paying one point or $1,000 (.01 x $100,000
= $1,000) you will reduce your monthly payment
by $17.58. Dividing the point cost by the
monthly savings shows that it will take you 57
months to make up for paying the point
($1,000/17.58 = 57 months).
A more complex method involves variables such
as the borrower's lost rate of return on money
used for discount points and the risk/reward
ratio of the buy-down.
For more in-depth information on buying down
a rate,
click here.
What type of mortgage
should I get?
There are a multitude of mortgage types
currently available, though most mortgages fall
into one of three categories: Conventional, VA
or FHA.
Conventional mortgages are the most common
and most flexible and are not insured or
guaranteed by any government entity. Down
payments typically range from 3% to as much as
desired, though some 0% down payment programs
are available. Typically, mortgage insurance
(non-government) is required for conventional
loans with down payments less than 20%. However,
alternative options are available that provide
loans without mortgage insurance even with very
low down payments. A loan officer can best
direct you to a program that meets your
objectives.
VA loans are guaranteed by the Veterans
Administration and are available to qualified
veterans. The primary benefit of a VA loan is
the ability to obtain 100% financing. The
veteran pays a funding fee to the VA at closing,
and the fee may be included in the loan. The
funding fee varies from 0% to 3% of the loan
amount, depending on a variety of factors.
FHA (Federal Housing Administration) loans
require very low down payments and are insured
by the FHA. A one-time premium is paid at
closing and a small monthly premium is included
in the loan payment. The amount of the up-front
and monthly premium varies with the term of the
loan and the loan-to-value ratio.
For more information on loan categories
(Conventional, VA, FHA),
One particular caution is the “two percent”
myth. The industry is riddled with the mistaken
belief that refinancing is worthwhile only if
the new rate is two percent lower than the
current rate. That's like saying you shouldn't
buy a new house unless it's at least 20% larger
than the current house! In some cases
refinancing may be worthwhile for a very small
drop in rate; in other cases refinancing may not
be worthwhile even with a huge reduction in
rate.
A loan officer experienced in refinances can
be invaluable in your decision process
What is an adjustable
rate mortgage?
An adjustable rate mortgage (ARM) has a rate
that's guaranteed for an initial period of time,
then adjusts based on market conditions. Many
adjustable rate loans can be converted to
fixed-rate loans. The length of the initial
rate, the method and limitations of the
adjustments, and the convertibility of the loan
to a fixed-rate varies with the loan product.
Borrowers have substantial flexibility due to a
large variety of ARM products from which to
choose, making ARMs a wise choice for many
borrowers. For more information about adjustable
rate loans,
|
