It was not so long ago that the prime rate of 4.5 percent. Today it is 7.5 percent, 300 basis of "points" (3 full percentage points) higher. This is astounding progress, while mortgage rates are not directly related to the prime rate, they have moved up smartly. Now for the fun. You do not have to be completely at the mercy of these advances. There is a tactic that you need to know and understand, because it could mean that they will be paying prevailing rates 1 or 2 years before they are today. It's called "buying your rate ."
Here's how it works .
cash loan lenders that they usually do not own. They borrow it from someone else and trade for the "renting" or lend it to you on a gentle characteristics of the rate. They make their living on the difference. They can be paid in advance in the form of discount or point of origin (point 1 percent of the loan amount), or may be paid by the people who lend them money loaning you money at a rate higher than what they paid. In this latter case, informally known as paid "back", you could actually end up paying no points for your loan. With these dynamics, you can easily see that could be paid in advance for all points of a loan that has a rate lower than the rate charged to your lender to borrow money for your loan, or you could pay anything in advance, then borrowing money at a rate higher than your plaćeno.Stopi lender charged the lender for the money he uses for your loan is called a "pair". If a lender loan you the money at par, it seems ništa.kupiti down the principle is exactly the same if you use it for 30 -. year fixed rate or a 6-month interest only adjustable rate mortgage (ARM) or any business between
(It does not really work as a pay option ARM -. We'll talk about that another time) Let's look at today's rate card in the United Federal Mortgage, mortgage bank in Rockville, MD to get loans in all 50 states. Let's just look at the 30-year fixed rate loan in order to learn about this tactic. The lowest rate on the rate card is 5.625 percent, a full 187.5 basis points (1.875 percent) below prime. It is very cheap today. The highest rate on a rate card is 6.875 percent, 62.5 basis points (or 0.625 percent) below premijera.Razlika between the price of money on these two rates is 4.314 points. Do not look for the relationship between prices and money rates, the eyes will start to see ghosts. Just trust that the lender or it will take 4.314 points to 5.625 percent advance, credit or no points at all for a 6.875 percent loan. Let's apply the math to work if you have a $ 300,000 mortgage.
first of all, let's calculate the point value. That is $ 300,000 times 4.314 percent, or $ 12,942. If you are buying a new house it means you have to take your closing costs and $ 12,942 cash discount to the closing. If you are refinancing, it is likely to be painless, if those dollars can be plucked from the equity in their home. In any case, your loan will be 5.625 percent. For your protection, ask your banker to provide you with the truth in lending statement and good faith estimate for the low and high scenarios. Keep both documents for both offers in order to protect yourself at the closing. (See "pickpockets", MCG, Jan06, p. 43.). Critical to make your choice after you review these documents and calculate your break-even point. This way you will keep them somewhat honest in crafting your business.
Other , to calculate your monthly payment if you pay the full points. In this case, a loan of $ 300,000, which is fully amortizing at 5.625 percent, will cost you $ 1,727 for principal and interest each month for 360 months. You paid $ 12,942 for the privilege of paying the low monthly payments. (No mention of payment for taxes and insurance, because they will be the same for any funding strategy and pursue .)
third , to calculate your monthly payment if you pay no points. In our example loan of $ 300,000, which is fully amortizing at 6.875 percent, will cost you $ 1,971 for principal and interest each month for 360 months. You paid nothing for this rate. Now for the clincher. Share points ($ 12,942), the difference in monthly payments and determine the break-even point. In this case the difference is $ 244 a month, and you will appear to break even 53 months in the life of 360 - month loan. Your break even, therefore, is extremely compelling. During the term of the loan will save $ 87,840 if you only collect $ 12,942 in discount points today.Up the bonus? Make sure your banker is characterized every dollar as a discount point, not as a source point. Then talk with your certified public accountant. I bet that everything will be recognized! In conclusion, the next time you visit with your mortgage banker, it was the lowest at the highest speed cards. Divide the difference in monthly payments on the points needed to buy down the rate. If you break even is acceptable, go for a lower rate. Start your own calculations and make your own determination. Some math to drive your decision.
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