Mortgage Loans -- Those Salient Points
Best Mortgage Rates Are Not the Only Criterion
Back in April 2010, a Wall Street Journal blog reported an online survey that had found that the average American spends five hours choosing a mortgage. That's half as long as he or she spends deciding on a car, and only an hour more than on selecting a computer. Indeed, close to a third of the survey's participants said they spent a maximum of two hours shopping for a home loan. No wonder the Journal's headline was, "Why Americans Get Ripped Off on Mortgage Loans".
But wait a minute. Maybe those figures are more understandable than at first glance. All too many of us think that finding the best mortgage rates and finding the best mortgage mean pretty much the same thing.
Getting the Point(s)
However, one of the factors that can make a big difference to the quality of your overall mortgage loan deal is the points you pay on closing. But what are points, and how can you use them to your advantage?
As the Boston Globe recently explained, there are two types of points. In both cases, one point equals one percent of the amount you're borrowing (so one point on a $200,000 home loan costs you $2,000), but there the similarity ends.
First, there are "origination points", which are really just the fees that some lenders charge borrowers for setting up ("originating") the loan. The other sort are called "discount points", and these are the ones that are more interesting. That's because they buy you a discount on the rate that you pay for your mortgage.
A Straight Calculation
There are four key questions to ask yourself before deciding whether to "buy" discount points, and you probably need to answer yes to them all:
- Is my loan a fixed-rate mortgage?
- Can I afford to buy the points AND make the full downpayment AND cover all my closing costs?
- Does the rate reduction I'm being offered for each discount point make this the best overall deal available?
- Will I be living in my new home long enough for me to recoup the cost of the discount points with the savings I make on my monthly payments?
Those last two are especially critical. Different lenders offer different rate reductions per discount point, and it's important to work out which deal will deliver the lowest monthly payments. And you need to be reasonably certain that you'll stay in your new home long enough to recover the cost of buying the discount points.
Luckily, you can use the shoprate.com mortgage calculator to find the difference that your discount points will make to your monthly payments. Then divide the cost of those points by that difference to see how many years and months you have to stay put before you break even.
Compare Mortgage Rates AND Deals
One good thing that happened in 2010 (yes, there was one) is that it became easier to compare mortgage deals. Previously, it was difficult to differentiate between the best mortgage lenders and the worst, because the information provided seemed almost designed to confuse.
However, the New York Times (1/22/2010) reported that a new, standardized Good Faith Estimate form added much-needed transparency to lenders' offers, and made it significantly easier to identify the best.
You can kick off your research when you compare mortgage rates here, and obtain mortgage quotes here.
