On September 21 of this year I wrote a column, "I Didn't Know This - Did You?" talking about seven instances in the mortgage industry that either confused most people or were completely unknown by the group. I received a fair amount of correspondence that ratified my suspicion that most people have a desire to understand more about mortgages. I decided to continue on with another seven, and hope the results might be as good or better than the earlier article. I am going to talk with you about interest only loans, paying points, bi-weekly mortgage payments, the option arm, sub prime loans, margins in a variable loan, and the cost of rental unit financing. I think you are going to be surprised about what you know and don't know about mortgage loans.

Let's start with a shocker. Interest only loans do not exist. Interest only is an optional way to pay a standard loan – it is not a type of loan. One can have an interest only option on a 30-year fixed, or a five year arm, or on a straight variable, etc. I believe there are even some companies that offer interest only on loans that are amortized less than 30 years, but I haven't personally seen one.

Interest only options are set for a period of years and can be used every month, or once in a while (say three months a year), or never at all, your choice. The option provides you the opportunity to pay just the interest on the loan, not the principal, whenever you choose to do that. It results in a lower payment and doesn't have any negative side effects, as your balance remains the same when you pay interest only.

You can now understand why Wall Street is wrong about the interest only option. It doesn't hasten the loss of a home by anyone, as you have the remedies to fix the problem of property valuation within your loan: the ability to pay the principal down anytime you are worried about the equity or lack thereof in your house.

Now it is time to get to the point, so to speak. What is a point? When should it be used and not used? And what are the tax ramifications of point(s)? One point is equal to one percent of the loan balance, and is prepaid interest given to a lender to get a lower interest rate. The way to analyze the value of the point(s) is to take the difference in the monthly payments with a point and without a point and then divide the difference into the cost of the point. This will tell you, in months, how long it will take you to pay yourself back by the monthly savings you get from the lower interest rate. Two years or less is great, two years to three years is okay but over three years is questionable.

Example: A $300,000 loan that is 30 year fixed. Rate of 6.375% with zero points or 6.125% with one point.

The cost of the point (1% of the loan amount) is: $3,000

The monthly payment with the 6.375% rate is: $1,871

The monthly payment with the 6.125% rate is: $1,823

Your difference in payments is: $ 48

Dividing $3,000 by the $48 savings equals 62+ months.

Points are generally worthwhile on loans shorter than those amortized over 30 years, as most people stay in those types of loans for twice as long as they do in a 30 year loan. I am referring to 20 year, 15 year and 10 year fully amortized loans.

Points are tax deductible on a purchase, but must be amortized over the life of the loan on a refinance. This leads to some interesting tax planning. If you have paid a point or more in a refinance on a 30-year loan within the last 5 years, the most you could have written off is 5/30 of the point(s). If you were to refinance now you could write off the balance of the unamortized points and get a tax write off this year while taking a loan that works better for you. More to follow later on points…. Continued...