Should You Buy Points or Pay More Interest Rate?

The interest rate on a mortgage is and should always be quoted with the points you need to purchase to qualify for that particular rate.

In most cases one point is equal to 1% of the amount that you borrow. For example if a lender says that a loan costs 1.5 points they mean that if you take the loan you must pay the lender 1.5% of the loan amount as points. On our $200,000 loan 1.5 points will cost you $3000.

Most of the mortgage lenders will charge you points. However, there are certain mortgage lenders that may offer you a home loan without the requirement of purchasing any points.

However, this does not mean the loan is going to be necessarily cheaper.

Usually there is a trade-off between the points that you purchase and the interest rate you pay on your mortgage loan. The more points you purchase the lower interest rate you qualify for.

Some lenders will push a zero point mortgage rather aggressively. In almost all such cases, their interest rates or other charges are such that they offer no additional benefit.

The question of whether or not you should buy points, or how many you should buy, you need to do a simple calculation that involves how long you intend to stay in your home.

If you intend to stay in your house for several years, making a down payment for the purchase of points will save you money.

If you are constricted for cash during the time of the mortgage or you do not intend to stay in the house for a long time then you may go for a no points mortgage with a higher interest rate.

The bottom line is, the longer you intend to stay in the house, the better it is to get a lower interest rate.

Take the following example. Suppose you borrow $150,000 for a home loan. One lender quotes to 7.25% on a 30 year fixed-rate mortgage and charges 1 point.

Another lender quotes 7.75% which is .5% higher than the first one and doesn’t charge any points.

It is obvious that you will save more money on your monthly payments with the first mortgage that has the points.  

The 7.25% mortgage costs $ $1024 per month and as compared to 7.75% mortgage you save $51 per month.

In order to recover the $1500 that you paid to purchase the point you will have to stay in the home for approximately 29 months.

If you keep the loan for the remaining term of the mortgage, you will save $16,850 with the point purchase mortgage.

In order to make a fair assessment of the different loan programs offered by mortgage lenders, have them provide interest rate quotes in written where the point should also be mentioned.

Make sure that the comparison is done between similar mortgages with same term.

Also, keep in mind the other costs associated with a mortgage such as closing costs, loan origination fee, processing fee etc.

Features of a No Cost Refinance Mortgage

A no cost refinance mortgage seems enticing to a lot of people. They figure that they have nothing to lose since they do not have to foot any costs in refinancing the mortgage. They are able to refinance at a lower interest rate or get extra cash from other expenses without having to spend any money. However there are certain advantages, drawbacks and features of a no cost refinance mortgage that you must know about and consider before choosing this kind of a mortgage for refinance.

What Is a No Cost Refinance Mortgage

A no cost refinance mortgage is typically a mortgage where the borrower does not have to pay any of the closing costs. All the fee including the processing fee, application fee and closing costs are paid for by the lender. It is another matter that this amount may be included in the sum of the original mortgage.

Disadvantages of a No Cost Refinance Mortgage

While this may seem like a win win situation to the consumer it is not necessarily the case. The main drawback of a no cost refinance mortgage is that since the lender is paying for the closing costs of the mortgage, he seeks to recover his money by offering a slightly higher rate of interest than he would otherwise. This means that even though you do not spend anything when refinancing with this kind of a mortgage, you may end up paying much more than the initial closing costs for the entire term of the mortgage. This is because even a marginal difference in the interest rate can make a difference of thousands of dollars over the entire mortgage tenure.

No Cost Refinance Mortgage is a Short-Term Solution

As mentioned before the lender tries to recover the money that he pays for the closing costs of the loan by increasing the interest rate of the mortgage loan marginally. He’s expecting to recover his money from increased interest over the tenure of the mortgage and in fact in the end he is hoping to make much more than what he invested. This is why are no cost refinance mortgage is a more advisable solution for a short period that is if you are intending to stay in your house for 10 years or less. If you intend to stay in the house for the next 30 years then no cost refinance mortgage might fall to be much more expensive in the long run.

Varying Rates on No Cost Refinance Mortgage

Because it is up to the lender to increase the interest rate as he perceives the risks to be of paying the closing costs for the borrower, different borrowers might hike up the interest rate by a different much in. It is your best interest to shop around with several mortgage lenders to you can find the best rates that you’re ready to work with. Starting with your own mortgage lender may be a good place to begin. The lender that you have worked with so far may be more inclined to give you a better rate since you have a previous distance relationship with.

Common Closing Costs For A Home Loan – Federal Reserve Board

Additional fees that you pay while purchasing a home apart from the mortgage cannot be predicted with a great deal of accuracy. They depend a lot on the location, your state rules, the lender and the cost of the home.However, there are some costs that are common. There is also a range of amount that is charged that is common. These are provided in the table below.

The additional costs listed below are the common guidelines provided by the Federal Reserve Board.

Fees Cost
Application FeeLoan Origination Fee $75-$300 including credit report for each applicant.1 – 1.5% of the loan amount.
Points 0-3% of loan amount
Appraisal FeeLender Required Home Inspection $300-$700$175-$350
Prepaid Interest Varies based on the loan amount, interest-rate and number of days that must be paid. ($300-$750 is common)
Private Mortgage Insurance Up to 1.5% of loan amount to prepay first-year
FHA, VA or RHS Fees 1.5%, 1.5% to 2% or 1.75%
Home Owners Insurance $300-$1000 per year pending on home price
Flood Determination Fee $15-$50
Survey $150-$400
Source: Federal Reserve Board  

 

There are other costs that may be levied by your lender while extending you the mortgage loan. While these may the usual fees levied by the lender, some of them may be negotiable and even completely avoidable. Processing fee and application fee is extra profit for the lender. While almost all of them charge it, a bank that you usually do business with may be willing to reduce the charge if not completely waiver it.

Because many people shop around for mortgage, a lender charges an application fee to make the effort of processing your application worthwhile even if you decide to go with another lender for the mortgage loan. However, if you finalize the deal with one, you can ask for the application fee to be removed since it is more profitable for the lender to strike a mortgage loan deal for your rather than charge you the application fee.

Junk fees and extra large amounts can be reduced and avoided.

Additionally:

In the midst of all the people involved in the deal and telling you which paperwork to sign and how much to pay and how it is easy to loose track of the various costs involved. You started out by looking at the cost of the home and applying for a mortgage.

But now you will realize that there are other costs when buying a home that are commonly known as ‘closing costs’. Not only should you understand these costs in order to know exactly how much you are gong to be spending by the time the house is yours but also to save money on these costs.

Recurring Closing Costs

Recurring costs are the costs that you have to pay over the mortgage amount not only at the time of the deal but also on a recurring monthly or annual basis.

These include real estate tax, home insurance and if you are paying less than 20% of the cost selling price of the home as down payment, then Private Mortgage Insurance as well.

Most of these payments are payable in advance. So while the house tax may be valid after one year of living in the house, you are made to pay it in advance during the time of the purchase in order to cover your next years obligation. This is known as putting money in escrow.

Non recurring costs are fees that are paid during the time of the closing of the deal but are one time in nature. You are not required to pay them again. These kinds of cost usually add to the original cost of the home and the mortgage.

Home Loan closing costs include but are not restricted to:

  • Fees associated with the mortgage loan like Origination Fee, Appraisal Fee, Credit report Fee, Tax Service Fee, Document Preparation Fee, Wire transfer Fee, Office Administration Fee etc.
  • Application Fee by the Lender Broker’s Fee if you are dealing through a Mortgage Broker.
  • Any additional service required by the lender such as Pest inspection or home appraisal.

Closing costs may also include:

  • Federal Housing Administration Fees.
  • Veteran Administration Fees.
  • Rural Housing Service Fees associated with mortgages guaranteed by government.
  • A flood determination fee to investigate whether the property is in an area prone to flooding.
  • A land survey to verify the property’s boundaries.
  • Title charge which may include a settlement fee, titles such, title examination, closing service letter, deed preparation, notary fees, attorneys fees and title insurance.
  • A host of other miscellaneous costs may include a courier delivery fee, endorsements, recording fee, transfer tax and optional home warranty.

Avoid Extra And Junk Fees On A Home Loan

It is easy to end up paying more that you have to for a home because of all the extra fees that are attached to a mortgage loan. Many of them can be reduced if not avoided all together.

For most people, taking out a mortgage to buy a home is not something that happens many times in a lifetime. Because of this people are usually unaware of the procedure involved. You mostly depend on the information given by loan agents and lenders on procedures, paperwork and fees.

The different charges and fees you have to pay differs by the location, the lender and the value of the home that you are purchasing. 

The fees levied by lenders and other individuals involved such as the mortgage broker and real estate agents are variable.  Certain charges billed to you by your lender such as processing fee and application fee can be negotiated on once you have decided which lender to use for the mortgage.

The extra charges that are levied by the government such as the Federal Housing Administration fee And the Veteran Administration Fee are usually unavoidable and non-negotiable.  You just have to absorb these costs in the total amount of your mortgage with a pinch of salt.

The extra charges and fees levied by the lender or the broker that are not a prerequisite of any government or federal law are usually termed as ‘ garbage’ or ‘junk’ fees.

If any charge seems uncommon or the amount seems to abnormally inflated you can question it and check it up. While the junk and the extra fees may or may not be wholly avoided they can be reduced and the inflation of your mortgage minimized.

Watch out for excessive processing and documentation fees in the following:

  • application fee
  • underwriting fee
  • mortgage rate lock fee
  • loan processing fee
  • broker rebate

Additional fees that are charged by the broker of the lender can usually be negotiated upon.  It may seem odd to do this but even the mere act of questioning the fees may be successful in getting your reduced or a waiver of the additional charge.