Three Myths of Mortgage Financing

Taken from AAXA Newsletter - 2006

1. Myth: Good Faith Estimates are binding agreements that disclose all costs associated with a loan.

For years, homebuyers would ask mortgage providers for Good Faith Estimates and base their decisions according to the lowest closing costs provided. Many of these same customers were shocked to find out that they needed to bring a considerably larger amount of money to the closing table. Good Faith Estimates are just that, estimates. One lender may include three months of taxes while another uses six months; one broker may disclose origination fees as points and another may call it a mortgage broker fee. If a lender or broker is unwilling to guarantee their fees and rates in writing, then it is time to move on to a company that will. AAXA uses an Agreement for Financial Services which discloses all lenders’ and brokers’ fees up-front and in an easy to read format before a rate is locked with an investor. This allows all parties to move into the transaction without any confusion. At AAXA, we honor our commitments.

2. Myth: It never pays to pay discount points.

It is not that black and white. Rather, it is a matter of weighing savings versus cost recovery. Paying discount points helps consumers buy into a lower mortgage rate which, in turn, saves them money over the long run. However, you have to be in a home long enough to recoup the upfront costs.

Here is an example on how to calculate the costs and savings:

1 point is equal to 1% of the loan amount.

Thus, if you pay one point on a $150,000 loan (loan amount X 1%) – you end up paying $1,500 for the lower rate.

For example:

Loan Amount $150,000
30 Year Fixed Rate with Zero Points at 5.875%
Monthly Payment: $887.31
30 Year Fixed Rate with 1 Point at 5.625%
Monthly Payment: $863.48

Monthly savings by buying down the rate: $23.83
Savings over life of the loan: $8,578.80
Cost for 1 point: $1,500
Savings over 30 year term: $7,078.80 (savings minus the cost of the point)
Number of months you would need to stay in the house to recoup the cost of the point buy down: 63 (cost of the point divided by the monthly savings).

Thus, if you are planning on staying in the house for more than six years, it might be worthwhile to buy down the rate. Points may even be tax deductible in some cases so you should check with your tax advisor for more details.

3. Myth: Using mortgage shopping services like Lending Tree will always help you find the very best deal.

Competition between banks is great and we encourage our customers to shop around. However, what these mortgage shopping services don’t tell you is that they get paid from their partners for sending them their leads. Just because you get offers from four different banks that they select, what makes you think that the four banks are offering great pricing? We suggest calling several companies – both brokers and banks – and getting mortgage quotes. Be sure that the companies are willing to put their rates and closings costs in writing before making a commitment. If they are unwilling to do so or will only offer you a Good Faith Estimate, move on. If you have any questions regarding your next mortgage refinance, give AAXA a call at 877-728-3569.