The Lending Coach

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Tag: interest rates (page 2 of 2)

Tips on Interest Rates and Mortgage Shopping

During the home buying process, one key component for borrower consideration is the mortgage interest rate. As many know, rates vary widely from lender to lender.

You might wonder if the lowest rate is the best way to go…but please know there are other factors to take into consideration besides an advertised rate.

With that in mind, here’s a list of tips to help give the buyer confidence as they enter down the path of home ownership or refinancing a current home loan. The single best thing a potential borrower should do is to reach out to a trustworthy mortgage lender!

Do Your Research as You Compare Lenders

Be wary of rates that seem too good to be true. If a rate is far lower than most others, there may be significant extra costs involved – remember, there’s no such thing as a free lunch!

Be skeptical of lenders that have little to no reputation. Check the web for testimonials, run some Google searches and find out mor about them and the firms they work with. Consider how many years the lender has been in business and any complaints or bad reviews online.

If your lender can’t provide you with a solid list of references and referrals, they might not be the right one for you!

Education is Key: Learn About Loans and Rates in Order to Compare Them

It’s important that buyers decide what their goals are regarding that home purchase and whether you need a fixed or adjustable interest rate. A fixed interest rate means that the rate stays the same throughout the life of the loan. An adjustable rate starts off lower and then increases gradually, usually annually, but not beyond a maximum amount.

Talk to trusted industry experts, then with family or friends about what types of home loans they have had and what their experiences were with each type of loan and lender to get a better idea of what might work well for your situation.

Look Beyond the Actual Percentage Rate

Learn about the Annual Percentage Rate (APR) and points. The APR is the cost of credit, expressed as a yearly rate including interest, mortgage insurance, and loan origination fees.

With that said, the APR isn’t necessarily the best benchmark to utilize – find out more about that here….there really are other factors that weigh into this equation.

It’s important to know whether points are included with the APR as it will affect your costs of the loan. A rate may be lower, but may include points, which you will pay for and should account for when comparing home loan interest rates.

Look into other fees that are included with the loan. These might include Lender Fees, Appraisal Fee, and Title Services Fee to name a few.

In Conclusion

Taking the extra step to educate yourself on interest rates and your potential lender will really help you gain a better understanding of the process and options available.

I would be happy to give you the tools and information you need to make wise choices during your home buying journey. Got questions?  Don’t hesitate to reach out to me, as I’d be happy to answer any questions as you might have!

Understanding Discount Points – A Primer

There is a fair amount of confusion from prospective buyers about mortgage “points”.  What are they? Why do they exist?

Discount points are a one-time, upfront mortgage closing costs, which give a mortgage borrower access to “discounted” mortgage rates as compared to the market.

In general, one discount point paid at closing will lower your mortgage rate by 25 basis points (0.25%).

Do they help or hurt they buyer?

The answer, of course, is “it depends”.

Dan Green at The Mortgage Reports does a fantastic job in highlighting the definitions and costs/benefits of the paying points. You can find out more here….

By the way, the IRS considers discount points to be prepaid mortgage interest, so discount points can be tax-deductible.

What Are Mortgage Discount Points?

When your mortgage lender quotes you the interest rate, is typically quoted in two parts.

The first part is the mortgage rate itself, and the second part is the number of discount points required to get that rate.

You’ll notice that, in general, the higher the number of discount points you’re charged, the lower your mortgage rate quote will be.

Discount points are fees specifically used to buy-down your rate.

On the settlement statement, discount points are sometimes labeled “Discount Fee” or “Mortgage Rate Buydown”. Each discount point cost one percent of your loan size.

Assuming a loan size of $200,000, then, here are a few examples of how to calculate discount points for a mortgage loan.

  • 1 discount point on a $200,000 loans costs $2,000
  • 0.5 discount points on a $200,000 loan costs $1,000
  • 0.25 discount points on a $200,000 loan costs $500

Discount points can be tax-deductible, depending on which deductions you can claim on your federal income taxes. Check with your tax preparer for the specifics.

How Discount Points Change Your Mortgage Rate

When discount points are paid, the lender collects a one-time fee at closing in exchange a lower mortgage rate to be honored for the life of the loan.

The reason a buyer would pay discount points is to get the mortgage rate reduction; and, how much of a mortgage rate break you get will vary by lender.

As a general rule, paying one discount point lowers a quoted mortgage rate by 25 basis points (0.25%). However, paying two discount points, however, will not always lower your rate by 50 basis points (0.50%), as you would expect.

Nor will paying three discount points necessarily lower your rate by 75 basis points (0.75%)

As outlined by Dan Green in his Mortgage Report article, here’s an example of how discount points may work on a $100,000 mortgage:

  • 3.50% with 0 discount points. Monthly payment of $449.
  • 3.25% with 1 discount point. Monthly payment of $435. Fee of $1,000.
  • 3.00% with 2 discount points. Monthly payment of $422. Fee of $2,000.

You’ll note that when you pay discount points come, it costs at a cost, but it also generates real monthly savings.

In the above example, the mortgage applicant saves $14 per month for every $1,000 spent at closing. This creates a “breakeven point” of 71 months.

Says Green, “Every mortgage loan will have its own breakeven point on paying points. If you plan to stay in your home beyond the breakeven and — this is a key point — don’t think you’ll refinance before the breakeven hits, paying points may be a good idea.”

Otherwise, points can be waste.

“Negative” Discount Point Loans (Zero-Closing Cost)

Green highlights another helpful aspect of discount points is that lenders will often offer them “in reverse”.

“Instead of paying discount points in order to get access to lower mortgage rates, you can receive points from your lender and use those monies to pay for closing costs and fees associated with your home loan,” he says.

The technical term for reverse points is “rebate”.

Mortgage applicants can typically receive up to 5 points in rebate. However, the higher your rebate, the higher your mortgage rate.

Here is an example of how rebate points may work on a $100,000 mortgage:

  • 3.50% with 0 discount points. Monthly payment of $449.
  • 3.75% with 1 discount point. Monthly payment of $463. Credit of $1,000.
  • 4.00% with 2 discount points. Monthly payment of $477. Credit of $2,000.

Homeowners can use rebates to pay for some, or all, of their loan closing costs. When you use rebate to pay for all of your closing costs, it’s known as a “zero-closing cost mortgage loan”.

When you do a zero-closing cost refinance, you can stay as liquid as possible with all of your cash in the bank.

Rebates can be good for refinances, too, as loan’s complete closing costs can be “waived”. This allows the homeowner to refinance without increasing its loan size.

When mortgage rates are falling, zero-closing cost mortgages are an excellent way to lower your rate without paying fees over and over again.

Please do reach out to me to find out more about how utilizing discount points can help you in your next transaction!

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