Below
you will see the format used in a typical mortgage quote:
8.75%
0 + 1
8.75%
is the interest rate.
Don't
get too focused on the interest rate. I don't mean rate isn't important,
but you will find your loan amount has a much greater impact upon your
monthly payments than does the rate. Rates change daily by minor amounts
(sometimes 2-3 times a day) so they will fluctuate throughout your loan
process. Once you decide to lock your rate, never look at rates again!
You won't have gained or lost much by any subsequent changes and all
it can do is make you miserable no matter which way the market moves.
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While
we are on the subject of rates, you will not find any significant
difference in rates between mortgage companies. They all "dip
from the same Fannie Mae/Freddie Mac money well" so you
will find that the main difference between mortgage companies
is their Service, their Ethics and their people not rate. Find
a company & Loan Officer you are comfortable with and then
stick with them.
Rate
changes affect everyone equally.
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0%
represents the points.
I
used 0% because most people prefer a 0 point loan, but there are many advantages
to paying points if you have the money.
Points
are considered interest and therefore a tax deduction for the Buyer even
if the Seller pays the points.
The
more points you pay the lower your interest rate. The textbooks say
there is approximately a 1/8% drop for each point paid - actually this ratio
can vary according to market conditions and loan type.
Points
are a factor of the interest rate. If you want a below market rate,
expect to pay points. If you are willing to take an above market rate,
you can have points paid to you which you can use to pay your origination
fee or closing costs.
The
dollar cost of each point is an amount equal to 1% of the loan amount.
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1%
is the Loan Origination fee.
This
is what the mortgage company charges for originating your loan.
This
cost never disappears.
If
you get a quote of 0% on the origination fee that simply means the mortgage
company has raised the interest rate to cover the cost. (see the example
below)
Don't
have much money? You could raise the rate a little more and use the
points PAID TO YOU to cover some of your closing costs.
Let
me give you a real life example of the options you have to juggle Rates,
Points and Monthly Payments. Most people are aware that by paying points
you can get a lower interest rate, but few are aware it also works the other
way. If you take a higher rate you can get points paid to you to cover your
closing costs.
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The
following example is for a $100,000, Plain Vanilla, 30 year fixed rate mortgage.
It will show you the relationship of points to interest rate and
interest rate to payment. These are actual rates from 1998.
|
%
|
COST
|
P&I
PAYMENT
|
| 7.375% |
2+1 |
$690.68 |
| 7.5% |
1+1 |
$699.21 |
| 7.625% |
0+1 |
$707.79 |
| 7.75% |
0+0 |
$716.41 |
| 7.875% |
(1)+0 |
$725.07 |
At
7.875% you would be paid 1 point or $1,000 to use towards your closing costs.
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