All About Points
Points are up-front interest. Lenders charge points as a way of being paid for the work and expense of processing and approving your mortgage. When you buy a home, the points are tax-deductible – you get to claim them as an itemized expense. When you refinance, in contrast, the points must be spread out for tax purposes and deducted over the life of the new loan.
Lenders quote points as a percentage of the mortgage amount and require you to pay them at the time you close on your home purchase. One point is equal to 1% of the amount that you’re borrowing. For example, if a lender says the loan has two points, that simply means you must pay 2% of the loan amount as points. On a $120,000 loan, two points cost you $2,400.
The interest rate on a fixed-rate loan has a direct relationship to that loan’s points. When you are able to (or desire to) pay more points on a mortgage, the lender should reduce the ongoing interest rate. This reduction may be beneficial to you if you have the cash to pay more points and want to lower the interest rate that you’ll pay year after year. If you expect to hold onto the home and mortgage for many years, this is a good deal!
Conversely, if you want to (or need to) pay fewer points (perhaps because you’re cash-constrained), you can pay a higher ongoing interest rate. The shorter the time that you expect to hold onto the mortgage, the more sense this strategy of paying less now and more later makes.
Don’t get suckered into believing that “no-point” loans are a good deal. There are no free lunches in the real estate world. Remember the points/interest-rate relationship: If you pay less in points, the ongoing interest rate will be higher. So if a loan has zero points, it must have a higher interest rate. This does not necessarily mean that the loan is better or worse than comparable loans from other lenders. However, lenders who aggressively push no-point loans aren’t usually the most competitive lenders in terms of pricing.
Want to know how this shakes out in terms of your bank account?
Suppose you want to borrow $150,000. One lender quotes you 7.25% on a 30-year fixed loan and charges one point (1%). Another lender quotes 7.75% and doesn’t charge any points. Which offer is better? The answer depends mostly on how long you plan to keep the loan.
The 7.25% loan costs $1,024/month compared to $1,075/month for the other mortgage. You can save $51 per month with the 7.25% loan, but you’d have to pay $1,500 in points to get it.
To find out which loan is better for you, here’s a formula:
Divide the cost of the points by the monthly savings ($1,500 divided by $51 equals 29.4). This gives you the number of months (in this case, 29.4 months) it will take you to recover the cost of the points.
The 7.25% loan costs 0.5% less in interest annually than the other loan. Year after year, the 7.25% loan saves you 0.5%. But, because you have to pay one point up front on the 7.25% loan, it will take you about 30 months to earn back the savings to cover the cost of that point.
So, if you expect to keep the loan more than 30 months, go with the 7.25%, one-point option. If you don’t plan to keep the loan for 30 months, choose the no-points loan.
To make a fair comparison of mortgage from different lenders, have the lenders provide interest rate quotes at the SAME point level. Ask the mortgage contenders to tell you what their fixed-rate mortgage interest rate would be at one point. Also, make sure the loans are of the same term – for example, 30 years.
5 ways to slash mortgage costs
Ready to plunk down your hard-earned cash for a slice of the American pie?
Buying a home is likely the most expensive, long-ranging financial commitment most of us ever make. The more homework you do before heading out with a real estate agent or before making an offer on a home, the more likely you are to stretch your mortgage budget.
Here are six ways to get the most bang for your money beginning before you step out the door to shop.
Get pre-approved
Get pre-approved for your mortgage loan, rather than just pre-qualified.
With pre-approval, the lender pulls a credit report, verifies a borrower’s income and takes other preliminary underwriting steps to come up with a maximum allowable loan amount. The lender also commits, in writing, to making that loan if a purchase occurs within a set amount of time. (In a pre-qualification, the customer provides the information, but the lender doesn’t check it and there’s no assurance that the loan will be approved.)
Pre-approval requires the home buyer to fill out a loan application and provide supporting pay stubs, bank statements, employment information and W-2 forms. Lenders charge for the service — generally from $20 to $50 — but it’s worth it. Pre-approval puts you in the strongest possible bargaining position with sellers! Those who are in a hurry to sell a property often will accept a lower bid from a pre-approved buyer because they can be certain the deal will go through.
Short on cash? Consider an adjustable-rate mortgage. ARMs feature lower monthly payments at first, something that might help marginal buyers get into a home.
“When you see interest rates going up, a lot of the adjustable-rate mortgages actually become more affordable at that stage in the game,” says Peter Goldberg, senior vice president of Ohio Savings Bank in Cleveland. “Ultimately people look for that lower payment and ARMs can really provide a lot of that.”
Based on a national survey of lenders, the interest rates offered for ARMs tend to be about 1.5 to 2 percent lower than the average 30-year-fixed rate. Someone borrowing $150,000 on a one-year ARM at 5.47 percent would have monthly payments in the first year of $849. The same-sized loan with a 30-year fixed-rate mortgage at 7.01 percent would cost $999 a month.
Float a balloon
Balloon loans are another option available to get a lower payment in the first few years. These mortgages charge less interest upfront for a set time frame, but require the borrower to either refinance at the end of that period, pay off the loan or convert it to a fixed payment schedule.
On a seven-year balloon loan, a borrower might make payments of principal and interest for that period of time. Assuming rates didn’t shoot up more than 5 percent in the meantime, they might then be able to pay just $250 to roll the loan into a fixed schedule for the last 23 years.
Buy down the rate
If you’ve got the cash now and want to lower your payments, you can “buy down” your mortgage rate.
It’s a simple concept, really: In exchange for more money upfront, lenders are willing to lower the interest rate they charge, cutting the borrower’s payments.
Buydowns can be temporary or they can last the life of the loan.
Trim closing costs
Of course, the mortgage rate isn’t the only thing that determines how much financing will set you back. Closing costs add a significant chunk of change to the final bill, so borrowers should try to minimize them, too.
How? For starters, consumers shouldn’t overshoot their budgets. Because the cheapest lenders often have the most conservative underwriting standards, borrowers can end up paying less in origination fees by showing some restraint.
As an example, say a couple with $52,500 available for a down payment wants to buy a $150,000 home. They might be able to qualify for a loan with just $400 in origination fees because the broker’s cheapest lender cuts deals for people who get mortgages for only 65 percent of their home values or less.
But if the same pair fell in love with a $240,000 home and refused to let it go, they would be getting a mortgage at about 78 percent loan-to-value. That’s still conservative, yet maybe not enough so for the cheapest lender. The broker ends up having to find another company willing to provide the money, and that company might charge $650 in fees.
So many people desperately need to pay top dollar for a house and that’s where they get into trouble. The cheapest lenders won’t work with them. The lower the rate that the lender has, usually those folks are real strict.
The same rule applies to other qualifying factors, such as debt-to-income ratio. A borrower who would only have to spend 28 percent of gross monthly income to get a mortgage should be able to obtain one more cheaply than a customer who would have to spend 35 percent or 40 percent.
Consumers have less control over the fees for other closing events because lenders and brokers negotiate them with various third-party providers. Somebody can’t call up the lender’s title insurance company, for example, and demand that it charge mortgage providers less for its services. But shoppers can take the Good Faith Estimate document that they receive during the loan application process and compare it with those from a couple of other companies. If a credit report costs $100 at one shop and $20 at another, but the second lender’s deal is better overall, point out the discrepancy and ask the preferred company to lower its charge.
Advantages of Home Ownership
There are two primary advantages of owning your own home:
1) You can call it your own. That means you can paint, install hardwood floors, build in an entertainment center, or put in closet organizers and mirrored wardrobe doors. You’ll also develop your own sense of community, and perhaps a little more space to raise a family.
2) Financial incentives. Home ownership is a first-rate investment for a number of reasons:
a. A sure-fire savings plan — Your mortgage payments serve as a type of scheduled savings plan. Over time, you gradually accumulate equity, as your home appreciates, and you can convert that equity into tax-free cash when you refinance. Or, you can convert that equity into a down payment for your next, better home.
RENTERS: You will continue to pay rent to your landlord with no equity, no appreciation, and no opportunty to cash-out or apply your equity towards a downpayment. The only savings plan you’ll have is what comes out of your earnings.
b. Stable housing costs — Your mortgage payment will stay the same throughout the entire time you live in your home, regardless of inflation. If you take on a $1400/month mortgage payment right now, it will still be a $1400 payment ten years from now.
RENTERS: Your rent will keep increasing, year after year. If you’re paying $1400/month right now, your rent will cost you over $2500/month ten years from now.
c. Increased value — Your home will increase in value, or “appreciate” over time. Currently, Orange County is anticipating 15% appreciation for this year. If you buy a home at $4000,000 right now, your appreciation will be $60,000 or more by this time next year (if appreciation holds true, and it should for the next few years).
RENTERS: You will experience no appreciation over the next year, and can only accumulate $60,000 if you save it out of your paycheck, or if a rich aunt dies.
d. Tax benefits — Homeowners get a significant tax break (several hundred dollars per month on an average condo) because your interest and property taxes are deductible.
RENTERS: You will experience no tax break on rent. Last, but not least, as the housing market continues to appreciate, and homes become more and more expensive, you’ll be glad if you buy now (because you may not be able to afford it later)!
How to avoid the 10 biggest mistakes people make when buying a home
1) Do your homework. Knowledge is power. There is tremendous information available on the internet to make sure you’re as prepared as possible. Visit open houses to get to know what’s available and what you like. Ask for comparable sales before making a purchase, and talk to the neighbors about the neighborhood.
2) Save the shrewd investments for the investors. Make your purchase based on what fits your family needs, not on what will happen to the market. It’s okay to do your homework and make sure you aren’t overpaying for a home, but trying too hard be shrewd can keep you out of the market.
3) Choose the best location. Even within a neighborhood, location matters. Does it back to a busy street, or is it too close to the entrance of the tract? Is your street the main access to a school? Is there a shopping center out the back window? Choose an inner tract location. For condos, end units are best for re-sale.
4) Scrutinize the interior floor plan. It may have gorgeous curb appeal. But no matter how attractive the exterior is (or the neighborhood), you need a livable home. Cosmetic fixups are easy to deal with – just make sure the floorplan itself is workable.
5) Make a needs & wants list for your family. How do you really live? Do you really need a formal dining room and living room? Would you be happier with an eat-in kitchen and a great room and a den to use as a home office? The house only needs to fit one family — yours.
6) Have a property inspection. This is not the time for surprises. Get an inspection from a qualified, respected professional. Not only will you find out what’s wrong with the home, but you’ll know the potential problems down the road.
7) Check out the builder’s reputation on a new home. Talk to three or four people who live in the builder homes and see what they have to say about how problems were resolved. (It’s also a great way to see what your neighbors would be like.)
Be patient enough to get what you want. This is a big decision. You need time. Impatient decisions can lead to mistakes. Do your research on the internet, visit open houses, and keep asking questions until you feel comfortable moving ahead with a purchase. Because once you find the right house, then you may have to move fast if there are multiple offers.
9) Shop for competitive loan packages. If you just wait for the market or interest rates to go down, you could be missing out on the perfect home. Warren Buffett says the rear view mirror is always clearer than the windshield. So take the driver’s seat, and start interviewing loan officers to see who can put together the best overall package for your loan. This will also give you the greatest negotiating position when you find the right home!
10) The biggest mistake: Not buying at all. If you can afford a home and you don’t make the purchase, you’ll lose the benefits of tax deductions, building home equity, and the appreciation in value.
9 Buyer Traps and How to Avoid Them
“A systemized approach to the home buying process can help you steer clear of these common traps, allowing you to not only cut costs, but also secure the home that’s best for you.”
No matter which way you look at it, buying a home is a major investment. But for many homebuyers, it can be an even more expensive process than it needs to be since they fall prey to at least a few of the many common and costly mistakes which trap them into either:
- paying too much for the home they want, or
- losing their dream home to another buyer or,
- (worse) buying the wrong home for their needs.
A systemized approach to the home buying process can help you steer clear of these common traps, allowing you to not only cut costs, but also secure the home that’s best for you.
9 Buyer Traps
This important report discusses the 9 most common and costly homebuyer traps, how to identify them, and what you can do to avoid them:
1. Bidding Blind
What price should you offer when you bid on a home? Is the seller’s asking price too high, or does it represent a great deal. If you fail to research the market in order to understand what comparable homes are selling for, making your offer would be like bidding blind. Without this knowledge of market value, you could easily bid too much, or fail to make a competitive offer at all on an excellent value.
2. Buying the Wrong Home
What are you looking for in a home? A simple enough question, but the answer can be quite complex. More often than not, buyers have been swept up in the emotion and excitement of the buying process only to find themselves the owner of a home that is either too big or too small. Maybe they’re stuck with a longer than desired commute to work, or a dozen more fix-ups than they really want to deal with now that the excitement has died down. Take the time upfront to clearly define your wants and needs. Put it in writing and then use it as a yard stick with which to measure every home you look at.
3. Unclear Title
Make sure very early on in the negotiation that you will own your new home free and clear by having a title search completed. The last thing you want to discover when you’re in the back stretch of a transaction is that there are encumbrances on the property such as tax liens, undisclosed owners, easements, leases or the like.
4. Inaccurate Survey
As part of your offer to purchase, make sure you request an updated property survey which clearly marks your boundaries. If the survey is not current, you may find that there are structural changes that are not shown (e.g. additions to the house, a new swimming pool, a neighbor’s new fence which is extending a boundary line, etc.). Be very clear on these issues.
5. Undisclosed Fix-ups
Don’t expect every seller to own up to every physical detail that will need to be attended to. Both you and the seller are out to maximize your investment. Ensure that you conduct a thorough inspection of the home early in the process. Consider hiring an independent inspector to objectively view the home inside and out, and make the final contract contingent upon this inspector’s report. This inspector should be able to give you a report of any item that needs to be fixed with associated, approximate cost.
6. Not Getting Mortgage Pre-approval
Pre-approval is fast, easy and free. When you have a pre-approved mortgage, you can shop for your home with a greater sense of freedom and security, knowing that the money will be there when you find the home of your dreams.
7. Contract Misses
If a seller fails to comply to the letter of the contract by neglecting to attend to some repair issues, or changing the spirit of the agreement in some way, this could delay the final closing and settlement. Agree ahead of time on a dollar amount for an escrow fund to cover items that the seller fails to follow through on. Prepare a list of agreed issues, walk through them, and check them off one by one.
8. Hidden Costs
Make sure you identify and uncover all costs – large and small – far enough ahead of time. When a transaction closes, you will sometimes find fees for this or that sneaking through after the “sub”-total fees such as loan disbursement charges, underwriting fees etc. Understand these in advance by having your lender project total charges for you in writing.
9. Rushing the Closing
Take your time during this critical part of the process, and insist on seeing all paperwork the day before you sign. Make sure this documentation perfectly reflects your understanding of the transaction, and that nothing has been added or subtracted. Is the interest rate right? Is everything covered? If you rush this process on the day of closing, you may run into a last minute snag that you can’t fix without compromising the terms of the deal, the financing, or even the sale itself.
