Choosing Rates vs. Points in a Mortgage Loan
Among the many decisions you will have to make when choosing a mortgage loan is whether or not to pay points. While a very high credit rating may give you the option of a low rate with no points, some borrowers will elect to pay points to reduce their interest rates.

For example, let's assume you were shopping for a $180,000 mortgage. You might be offered a 30-year fixed-interest mortgage at a 6 percent interest rate with no points, or 5.65 percent with two points. A point is 1 percent of the amount of the loan; in this example, each point would be $1,800. Therefore, you would pay an additional $3,600 for the lower interest rate.

As is generally the case when mortgage shopping, part of the decision will come down to your current financial picture. If you have the money at the time of closing, after paying your closing costs and your down payment, you might very well want to pay for points.

The other key factor in your decision will be how long you plan to stay in the house. Unless you are planning to stay for more than five years, you will not benefit from paying points, because you will not be there long enough to cover the additional payment. Even if you are planning to stay put from five to seven years, you may not come out ahead. You will need to sit down with a calculator and determine whether you will benefit from paying points on your loan.

But over the long term, points can save you substantial amounts of money. If you are planning to stay in your home for 20 to 30 years, you should seriously consider paying points -- but only if you have the money available when you close.

Returning to the example above, let's assume that you are buying a $200,000 home, and putting down 10 percent, or $20,000. Closing costs generally run about 3 percent, or $6,000 in this case. Coming up with another 2 percent, or $3,600 may or may not be an option. The total of $29,600 can be a lot to pay at one time. And don't forget to account for other costs associated with a new home, such as moving and furniture.

There are some financial advisors that will tell you that skipping points and paying the slightly higher interest rate is the better option. Their argument is that by putting the money into a higher yielding investment, you can use your money to make money. While this idea is potentially very sound, these short-term, high-yield investments are inherently risky. You will have to decide if you are comfortable with this level of risk.

Ultimately, the key factors in your decision will be how long you intend to occupy the house and whether or not you can afford the additional cash layout at the time of the closing.

Are you a Rate Shopper?

As you are shopping for a loan, make sure you are working with an experienced, professional loan officer. The large financial investment you are making is far too important to place in the hands of someone who is not capable of advising you properly and troubleshooting the issues that may arise along the way.  But how can you tell?

First, make sure the loan officer will guarantee IN WRITING their closing costs, interest rate and points charged.  Unfortunately, there are too many unscrupulous people in the mortgage business.  If they wont put it in writing, they don't know what they are doing or they are trying to bait and switch.

In addition here are FOUR SIMPLE QUESTIONS THE LOAN OFFICER ABSOLUTELY MUST BE ABLE TO ANSWER CORRECTLY.  IF THEY DO NOT KNOW THE ANSWERS RUN  DON'T WALK RUN TO SOMEONE WHO DOES!

1)  What are mortgage interest rates based on?  (The only correct answer is Mortgage Backed Securities or Mortgage Bonds, NOT the 10-year Treasury Note. While the 10-year Treasury Note sometimes trends in the same direction as Mortgage Bonds, it is not unusual to see them move in completely opposite directions.  DO NOT work with someone who has their eyes on the wrong indicators.)

2)  What is the next Economic Report or event that could cause interest rate movement?  (A professional lender will have this at their fingertips.  For an up-to-date calendar of weekly economic reports and events that may cause rates to fluctuate sign up for my newsletter above)

3)  When Greenspan and the Fed change rates, what does this mean and what impact does this have on mortgage interest rates?  (The answer may surprise you.  When the Fed makes a move, they are changing a rate called the Fed Funds Rate.  This is a very short-term rate that impacts credit cards, credit lines, auto loans and the like. Mortgage rates most often will actually move in the opposite direction as the Fed change, due to the dynamics within the financial markets.

4)  What is happening in the market today and what do you see in the near future?  (If a loan officer cannot explain how Mortgage Bonds and interest rates are moving at the present time, as well as what is coming up in the near future, you are talking with someone who is still reading last weeks newspaper, and probably not a professional with whom to entrust your home mortgage financing.)

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