Posts Tagged ‘Points’

How To Refinance

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This is a great time to refinance into a long term fixed rate mortgage, but it’s not always obvious how to do it in order to ensure the best combination of interest rate and costs, specifically Points. 
For example, the lowest rate is not automatically the best deal. This depends greatly on how long you plan to stay in the property.
My rule of thumb is if you expect to be moving within 5 years go for the lowest cost you can get and accept a higher rate for that short period.
If you expect to live there for more than 5 years pay some of the costs up front in order to get the lowest rate for many more years.
Next, take your preferred strategy to 4 different possible Lenders:
1. Your current Lender.
2. A local Credit Union.
3. A good Mortgage Broker.
4. A Major retail Bank i.e. BofA etc.
Ask each to give you a quote based on your situation. If you are not asked how long you plan to stay  in your  house get up, walk away, and go look for a professional.
One more thought. If tempted by an online or other mortgage advert, good luck, but be wary of the very common bait and Switch tactics often used in this business.
And last but not least, be aware that APR is a very flexible statistic which can be manipulated and interpreted in numerous ways. It is not a valid way to sellect a mortgage.

Points or No Points

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What are points anyway? Points are prepaid interest. One point equals one percent of the mortgage amount. One point on a $400,000 mortgage is $4,000. Historically one point will reduce the interest rate by 1/4%.

Many mortgage brokers will advise their clients to pay some points to reduce the interest rate on their loan. Usually they will show that after about 5 years the lower monthly payments will have returned the cash spent on points.

This is partially true, but still not necessarily a good reason to do it. Here are some things to consider:

1. Are you refinancing or getting a loan to buy a home?

  . Points on a purchase loan are tax deductilble that same year.

  . Points on a refinance must be spread over 30 years

2. On average homeowners either sell or refinance every 4.5 years.

  . Therefore you may never reach the 5 year break even date.

  . The 5 year break ignores profit from the points money invested elswhere.

  . Result; Lenders get the points up front and the loan is paid off early.

  . Higher profit per loan for the lender.

3. The points may be better spent on.

  . lowering the loan amount.

  . Paying down a high interest rate credit card.

  . Funding an I.R.A.

  . Etc, etc,etc.

The calculations for these alternatives are pretty simple but beyond the scope of this document.

I do not say that paying points is never a good strategy. It do say that it is rarely the best strategy when compared with with ALL alternative ways to save money when taking a mortagage.

Make sure your mortgage broker demonstrates the results of each alternative available to you based on your unique circumstances and plans.