When getting a home loan there are two costs that you should factor into your costs. Those are Private Mortgage Insurance and Points.
Private Mortgage Insurance (PMI) is mortgage insurance provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require mortgage insurance for a loan with a loan-to-value (LTV) percentage in excess of 80 percent. Basically, what this means is that if you put down less than 20%, and the lender has to give you a loan for 80% or more of the home price, then they will charge you a few hundred dollars extra per month to justify their extra risk of giving you a larger percentage loan. The more you put down, the less risk the lender has if you were to default on your payments and they had to take the house back and sell it (what a “foreclosure” is). If you put a little down, there is more risk that the home doesn’t sell for enough to cover what they gave you a loan for, and the lender loses money. Private Mortgage Insurance comes on both conventional and non-conventional loans. If you don’t understand what that means, read our article titled, Understanding Different Types of HomeLoans. Non-conventional loans like FHA loans, usually require you to refinance your loan if you reach 20% in equity and want to remove the extra PMI payment. Conventional loans usually just allow you to call up the lender servicing your loan and let them know you have 20% equity and would like it removed.
Buying points is an option loan borrowers have to lower their interest rates. Principal is the main amount you are borrowing (not the extra interest cost). Points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between you and the seller. Points are often in fractional percentage. It would be great if, for example, one point of a $200,000 mortgage amount meant it cost only $2,000. The reality is that $5,000 in points might get you an eighth of one point lower on your interest rate. There is a breakeven point that it generally makes sense to do a certain number of points, and a certain amount that does not make sense. The lender will allow you to buy your interest rate all the way to 0% either, they will let you know how many points you can buy.
For example, when I refinance my home, I was receiving a 3.125% interest rate. I wanted a 3.0% interest rate, which was going to lower my monthly cost by $200 per month. Over the life of my loan (12 months x 30 years = 360 payments) the total extra cost of not paying the points to lower my interest to 3.0% would have been 360 x $200 = $72,000. The cost to move my interest rate from 3.125% to 3.0% was about $5,500. So, is it a good idea to pay $5,500 now to save $72,000 later? Heck yeah! The breakeven point in this scenario would be $5,500/$200 = 27.5 months. So if I’m still planning on being in the house and paying this loan for then 2.5 years I’ll start saving money each month.
If you are considering buying or selling a home this year, give us a call at Timber & Rose Realty Group. We would be happy to talk with you about all your options in saving you money when getting a home loan or negotiating with the other side so you don’t end up paying too much. Contact us here.
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