Understanding the complex world of mortgages
Financing your house: a guide for the perplexed
Sometimes parts of the world are so baffling that you can't make any progress without a helping hand. In Douglas Adams' 'hitchhikers guide to the galaxy', the solution came in the form of an electronic encyclopedia with the words 'Don't panic!' written in reassuringly large, friendly letters on the cover. Several centuries before, a Jewish scholar called Moses Maimonides tried much the same tactic with his own 'guide for the perplexed'.
So there's some hope for you if you want to catch a lift to the stars, or understand the minutae of the Torah - but where is the guide for the perplexed mortgage-shopper? Surely the confusion around mortgages is equal to that in space or religion - and just as many people end up broken by a failure to understand what's going on. Well, I'm afraid I won't be able to change that terrible situation, but I'll do what I can to clear up some of the worst confusion.
Calling all points
At some stage, you're going to be confronted with decisions about 'points' to make. When you buy your mortgage, a lender is likely to offer you different rates of interest in return for you paying more or fewer 'points' up-front. A point is a lump-sum payment of 1% of the cost of your mortgage. You pay your point when you arrange the mortgage, and you get cheaper rates for as long as you stick witht he mortgage.
There are also 'negative points' available from some lenders. That is to say, they will make you an up-front payment, but as a consequence they'll extract a higher rate from you for the duration of the mortgage.
Your approach to points is likely to depend on two things: your immediate financial situation, and how long you plan to stay with the same mortgage.
As for the first: clearly it's hard for you to make up-front payments of money you don't have. It normally won't make sense for you to take out a separate loan to buy points with. At the time when you are being asked to pay the points, your finances are probably already stretched to the brink, as you try to make a down-payment on your new home, and also deal with the immediate costs of moving. It might seem good to avoid paying any more at this time. On the other hand, what is a relatively small payment compared to the overall cost of your home could bring big rewards in the long term.
The second question you should be thinking about is how long you plan to keep your mortgage (with the same lender). Broadly speaking, the longer you plan your term to be, the more points you should buy. This is because the benefit of having points will be multiplied over the period of time that you gain from having to pay a lower rate of interest. If you invest in 5 points and change to a different lender shortly afterwards, you have effectively wasted 5% of the value of your house. But if you stay with the same lender for a decade or more, your investment in the points would probably be a sound one. The break-even mark, where you will face the same costs either by paying or by not paying points on your mortgage - tends to be between three and four years. To check this, you should perform te calculations yourself based on the rates being offered by lenders you are considering.
Making down payments
At the time you are arranging a mortgage, the cost of buying points could well be outweighed by the cost of making a down payment. Your down payment is the amount that you pay the owner of your new house from your own funds, the amount not covered by your mortgage.
The size of your down-payment will affect your mortgage in several ways. Firstly, you may only be approved for a mortgage if you make a down-payment. Lenders will only offer 100% mortgages to people who already have excellent credit ratings, and so for many potential homeowners, making a substantial downpayment is the only way to get a mortgage.
The size of your downpayment might also affect the terms and the interest rate of your mortgage itself. This is particularly true if you are at the lower end of the market, without an excellent credit. In such a situation, some lenders will see a larger down payment as an indication that you are trustworty, and they will therefore offer you a better rate.
Above all, the size of your downpayment will affect your legal position, notably whether you are required to have mortgage insurance. If you make a down-payment of more than 20% of the value of the property, you will not need to have mortgage insurance. This can save you a lot of money.
Fees, fees and more fees
There are a great many fees and taxes involved in the home market, and sometimes lenders may compete on the basis of claiming to pay some of these fees for you. This is often a good deal - not so much for the financial benefits (the cost of the fees will be passed on to you one way or another), but because it simplifies the paperwork that you need to do. This can be important, because fees are often increased if the paperwork is not correctly dealt with, and there are substantial fines levied in some cases if you fail to pay taxes on time. A common arrangement is that your lender will collect various fees from you as part of your regular mortgage payments, hold them in escrow on your behalf, and then pay them out to the appropriate parties at the appropriate time. That's a fairly good deal in most cases, despite the fact that the lender will benefit from the interest tey can earn on fees while they are held in escrow. The fees for missing one payment to an official body easily dwarf the profit the lender makes through escrow.
What we have to offer
We offer you the opportunity to get all of the information that you need. It's very simple to just fill out our form, and we will do the rest. You will receive all of the information on refinancing for your local area. You can search for lenders for free and get the best possible quote. The information you submit is secured, private and confidential and you will never receive spam mail from us.
We will help you get the best rates from up to four lenders. There are no obligations, no credit checks, and no social security number required. It takes just one minute to fill out the secure online form, up to four of the best lenders in your area will contact you and you can then choose the best lender at your convenience without the hassle of having to do all the research for each individual lender. We do that work for you.
