For example, consider a $100,000,
30-year, fixed rate loan on a home valued
at $200,000. No matter what the points
and interest rate you pay, an independent
appraiser won't give you a "zero-fee
appraisal", nor will a title company
give you rebate pricing for a policy of
title insurance.
Because of the inverse relationship between
points and interest rate, you can obtain
a rebate from the lender to cover some
or all of your points and other fees. By
increasing the interest rate on your loan,
the lender might pay some or all loan fees.
By reducing the interest rate on your loan,
you'll pay some or all of the loan fees.
As a borrower, you should
answer these questions before
you commit to a new loan:
Should I obtain a lower interest rate,
pay points, loan fees, or both? Should
I get a higher interest rate and reduce
out-of-pocket fees? To answer these
questions, estimate how long it will be
until you plan to sell or refinance. The
task then becomes finding the interest
rate / fee combination which is the least
expensive during this window of time.
Here
is a hypothetical example. For simplicity, "other
fees" are fixed at $1,000. You own
your home and are interested in refinancing
your high-interest loan to take advantage
of a new, low-interest loan. The interest
rates for zero point / zero fee loans are
well below your current rate, so you
know it's time to refinance.
Your employer
has indicated you might be transferred
in approximately three years. You
compare three rate / fee combinations
to identify which is the least costly
over the next three years. You're
considering a 30-year, fixed loan.
Comparing
the expense of different loans allows
us to consider only the interest portion
of the monthly payments. The principal
portion of the monthly payment is not considered
an expense. Therefore, only the interest
portion of the monthly payments are
considered in these examples. A financial
calculator or spread sheet program can provide
the interest portion of the monthly payments.
Here are the loan comparisons.
| Loan: 30-year,
fixed, $100,000, 8.0%, monthly
P&I payment = $733.82 |
| Month |
1 |
2 |
.
. . |
23 |
24 |
| 8.0% |
Interest |
666.67 |
666.22 |
|
656.11 |
655.59 |
| |
Points |
0 |
|
|
|
|
| |
Other
Fees |
0 |
|
|
|
|
| |
Cumulative
Total |
666.67 |
1332.89 |
|
15,214.70 |
15,870.29 |
| Loan: 30-year,
fixed, $100,000, 7.5%, monthly
P&I payment = $699.28 |
| Month |
1 |
2 |
.
. . |
23 |
24 |
| 7.5% |
Interest |
625.00 |
624.54 |
|
614.10 |
613.57 |
| |
Points |
0 |
|
|
|
|
| |
Other
Fees |
1,000 |
|
|
|
|
| |
Cumulative
Total |
1,625.00 |
2,249.54 |
|
15,252.35 |
15,865.91 |
| Loan: 30-year,
fixed, $100,000, 7.0%, monthly
P&I payment = $655.37 |
| Month |
1 |
2 |
.
. . |
23 |
24 |
| 7.0% |
Interest |
583.33 |
582.86 |
|
572.14 |
571.60 |
| |
Points |
1,000 |
|
|
|
|
| |
Other
Fees |
1,000 |
|
|
|
|
| |
Cumulative
Total |
2,583.33 |
3,166.19 |
|
15,290.61 |
15,862.21 |
The
cumulative total for each loan represents
the total expense related to the loan at
the end of a given month. Initially, the
expense of the 8 percent loan is much
lower compared to the others because the
8 percent loan is free of out-of-pocket
closing costs. The 7.5 percent loan
is a zero point, $1,000 closing costs loan.
The 7 percent loan example requires
the borrower to pay points and fees.
Initially,
the 7 percent loan is the most expensive.
At the end of month twenty-three, the 8
percent loan is still the least expensive. At
the end of month twenty-four, the 7 percent loan
is the least expensive. If we were to carry
out these examples, the 7 percent loan
would continue to be the least expensive.
This comparison suggests that you should
take the 7 percent loan. You'll be
in your home for three years, and beginning
in the second year you start saving
money with the 7 percent loan.
|
Refinance Sections
