Obtain a lower interest rate pay points

Nearly all lenders trade off points (fees paid at the time the mortgage money is loaned) and interest rates. Say you're looking at the choices shown in Table 3.9.

Which of these choices will give you the lowest costs? It all depends on how long you keep your mortgage. If you keep your loan for more than

Table 3.9 Illustration of Different Payback Calculations:

Interest Rate/Points Trade-Offs

$100,000 Mortgage at 30 Years

Interest Rate

Monthly

Months to Break

(%)

Points/Amount

Payment ($)

Even

8.0

0/0

$733

00

7.75

1/$1,000

716

58 months

7.5

1.5/$1,500

699

44 months

7.25

2.0/$2,000

682

39 months

6.75

3.0/$3,000

648

35 months

three years (36 months), the 6.75 percent/3-point loan will save you the most money. Although you pay an extra $3,000 at closing to get this lower rate, the loan will save you $85 a month over the 8.0 percent/0-points loan. Compared with the 8.0 percent mortgage, you'll earn back your $3,000 in points in just over 35 months ($3,000 ^ $85 = 35.29). After that, it's all gain.

The figures in Table 3.9 illustrate a simple way to compare costs, although the actual trade-offs you see will differ from these. This calculation works well to select the lowest loan cost based upon your expected circumstances. A competent loan rep can work through interest rate/points tradeoffs with you to figure out which look best. A greedy loan rep may steer you into an interest rate/point combination that yields the largest sales commission. Don't ask your loan rep, "Which one is best?" Instead, ask him or her to show you the lender's rate sheets that list trade-off choices—often as many as 10 or 12—then work through the numbers together after the loan rep clearly explains the results.

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