Three Myths of Mortgage Financing
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
banker may disclose origination fees as points and
another may call it a mortgage banker fee. If a lender
or banker is unwilling to guarantee their fees and
rates in writing, then it is time to move on to a
company that will.
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
customers to shop around. However, what these mortgage
shopping services don’t tell you is that they
may 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 bankers
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, contact some of the companies in the
survey using the button below.
