Mortgages… if you plan to buy or refinance your home, you need to be very careful about the mortgage loan you select. There are many gimmick loans on the market today such as “interest only loans” and “negative amortization loans” that help people buy expensive property by the skin of their teeth. Having been a loan officer for several years in the past, I have often wondered why people don’t just stick with the traditional “30-year mortgage” and buy (or refinance) what they can afford. If you’re planning to buy or refinance a home, consider the following… In my opinion, a 30-year fixed-rate loan is better than a 15-year fixed-rate loan and here’s why… it has a higher monthly payment low with a 30-year fixed-rate loan. one-year loan than a 15-year loan. What if something happens to your income?

Sure, you can pay off a 15-year mortgage faster, but you have a higher house payment strapped to your back and if ANYTHING causes your income to drop, you may find yourself hard-pressed to make the house payment. Few people realize that you can pay off a 30-year loan in about 15 years by making 1 or 2 “principal only payments” on a 30-year loan each year. The key is for you to decide if you can afford to make those extra principal payments instead of being obligated to higher monthly payments under a 15-year loan. You may pay a slightly higher rate on a 30-year loan, but the comfort level and flexibility of a 30-year loan may be worth it. Adjustable Rate Loans (ARM’s) are risky business and tend to “adjust” over time. They say that “what goes up must come down” and with the interest rate you can bet that “what goes down must go up”. Here are some tips for people planning to buy or refinance a home:

1. Thinking of refinancing? Typically, you want to see a 2% improvement on your current interest rate and the proposed “new rate.” When you add up the costs of refinancing, as well as the time and hassle associated with the process, a refinance may not make much economic sense with a spread of less than 2%.

2. Find your break-even point by taking the total refinancing costs (divided by) the projected monthly savings at the new rate. Doing so will tell you how many months it will take to get your money back!

3. It is important how long you plan to own the property. Rule of thumb: If you plan to own the property for less than 5 years, a refinance may or may not make sense. Only you and the numbers can tell!

A “discount point” is 1% of the amount of money you borrow and is paid to a lender to secure a lower interest rate on a mortgage. Many people want to pay “points” to get a lower rate. But do you really get a lower rate? When you pay discount points, you’re basically prepaying the lender’s interest 15 or 30 years in advance! You’re giving up “real dollars” for an intangible “interest rate” that will result in a lower monthly payment… the bigger question is will you live in the property for 15 or 30 years? If not, why pay interest in advance? Tip: Zero point home loans often make the most sense.

Another good tip if you have equity in your home and need to buy a big item like a car…it may make sense to refinance the home and include the car purchase in the new mortgage. This way you spread the cost of your car over the life of the loan, avoiding the high-interest car loan with any tax advantages you may have as a result of your mortgage deductions.

Copyright © 2006

James W. Hart, IV

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