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….
Bi-weekly mortgages are not magical, as most people are led to believe. These are mortgages that you pay every two weeks, 26 times a year. They reduce a 30-year emaciation from 30 years to about 22 years. This happens because of only one thing: you are making 13 monthly payments a year instead of 12.
I think the borrowers who can make the best use of a bi-weekly payment are those who are paid bi-weekly and can match their payments to their income stream. If you are interested in paying down your mortgage faster, remember as the principal goes down, so does the interest on the principal, so each monthly payment has more going to principal and less to interest. A bi-weekly mortgage has the 13th payment being made in small increments all year long. A better solution is to make the extra payment at the beginning of the year and have a smaller principal balance at the beginning of the year and thus great principal pay down all year.
An option arm is one that gives the borrower 4 payment options: (1) teaser rate, (2) interest only payment, (3) a 15-year payment, or (4) a 30 year payment. The teaser rate leads to negative amortization, where your balance increases by the amount of interest you aren't paying each month (interest only payment less the teaser payment), and can cost people their house if they let it get out of hand. The other three options have too high of an interest rate.
The only unique point of an option arm is the worst part, the teaser rate. You can have all three other options if you take a regular 30-year amortizing loan with an interest only option. You will get a much better interest rate that way.
Sub prime loans are thought of as loans to people with poor credit. That is correct, but they are also for people with unusual properties, unusual credit problems, no reserves, unusual earnings documentation or unusual requirements. Because most sub prime lenders set their rates by loan to value and credit scores, they can at any given time have the best rates for the most qualified borrowers on the street: 700 plus credit scores and loan to values under 65%. My largest loan of recent times was to a borrower with a 700+ credit score, a loan to value below 65%, and documentation of a current W-2, a 1099 from another company in which he was a partner, and a lease on an industrial building where he was the beneficiary and his company was the lessee. The loan was $3.2 million, with $1.8 million cash out, and was a 5-year arm at 5.125%. It is now 3 years old and at the time of origination, no prime lender would give such a loan or meet the interest rate.
When we talk about variable rate loans, especially those that change monthly, quarterly, semi-annually or annually, it is all about the margin. I know there is a lack of knowledge about variable loans when I ask, "What's your margin" and the answer comes back, "What is a margin?" The margin on a variable loan (short for profit margin) is the amount added to the index to determine the rate at the time of change. The index generally moves up and down during the life of the loan, the margin is fixed.
The best margins are 1% to 1.875%, good margins are 2% to 2.25% and up to 3% is fair. Over 3% is not worth taking unless you need to take the loan.
Fixed arms – those that are fixed for 2 years, 3 years, 5 years, 7 years or 10 years – generally have high margins. These are not as important, as most people either sell or refinance after the fixed period.
Now that we realize the importance of margins, it is time to finish up with the pricing on investment property, one to four units. These are the highest cost of all the prime loans for one basic reason: In a crunch, the borrowers will always let the investment property go first. Lenders understand that, and therefore charge higher fees to reflect the higher risk.
We are still just scratching the surface in helping you understand the ins and outs of the mortgage industry. Most of what I have chosen to write about has come from listener inquiries. Feel free to write and ask any question that pertains to real estate that you would like to know. The more you improve your knowledge, the better you are going to do in the real estate world.