Businesses call themselves in the "Black" if they are profitable and in the "Red" if they are not. The origin of the term "Black Friday" is from the day most retailers finally get in the black, or profitable. You need to look at your mortgage the same way. When choosing a mortgage you will want to know the Break-Even point of your mortgage. Of course everyone wants the lowest rate. But, what if that low rate is not worth the cost.
Purchasing
Let's use an example. Your loan amount is $150,000 and your options are a rate of 4.25% and 4.5%. 4.5% is with no origination pt and 4.25% is available with 1% origination pt($1500). 4.25% is obviously the lower rate and your Principal and Interest payment would be $738. 4.5% has a payment of $760. So what is the benefit of the lower rate??? $22 a month. And if you divide the costs of getting the 4.25% rate($1500) by $22 you would recoup your costs in 68 months or 5.68 years. Which loan is best for you? It depends on your situation. Spending the extra $1500 may put a strain on you financially and is not worth the benefit of $22 a month in savings. Or maybe you plan on spending the rest of your life in this home, hence by the time you get to the 69 month this is an awesome investment as you will be saving an extra $22 a month after that with no cost.
Refinancing
Is it just as important to consider your break even point when refinancing your mortgage. When comparing mortgage options you will want to take in to consideration all costs involved divide by your savings. Such costs would include: all lender fees, origination pts, title company fees, appraisal fee, etc. Lets go over another example. You are saving $225 a month on your new mortgage and your total costs are $4500. You would recoup your costs in 20 months. That is considered a great refinance. The general rule is if you recoup your savings within 24-36 months that is considered a great refinance. Past 36mths you would want to make your own decision based on how long you plan on staying in the home.
Keep in mind if you are taking cashout out of your property or are refinancing to lower your term(ex. 30yrs to 15yrs) then there are different ways to compare mortgages. Since the loan terms would be different then your current mortgage. When getting a mortgage make sure you know all your options and then do the comparison based on your goals. Getting the lowest rate is great, but that low rate may not be your best mortgage option. I go over all possible mortgage options with my clients and do the comparisons with them. Making the process easier on them. Call me today to make sure you are getting the best mortgage possible.
Comments(3)