As a consumer in today’s marketplace you need to arm yourself with information to avoid being taken advantage of. This is true whether you’re shopping for a refrigerator or a mortgage loan. Just like that refrigerator your mortgage loan comes with different options from a variety of different lenders. If you’re a regular reader of this mortgage blog these options are familiar to you. Basic options include: prepaying points, escrow waiver, and a pre-payment penalty.
Points are a fee paid at closing to acquire a lower interest rate. A point is typically 1% of the loan amount. For example, 1 point on a $100,000 mortgage is $1000. The more points you prepay, the better your interest rate will be. Paying points is similar to a down payment; you are paying this fee so your monthly mortgage payment will be smaller and you’ll pay less interest over the life of the mortgage. The longer you stay in your home the more you’ll benefit from paying points.
Like any other good thing there is a negative twist to points on a mortgage. Negative points, sometimes cleverly disguised as “rebates” are payments to you from lender. For this “rebate” you pay a higher interest rate. You can use this cash at closing to pay your closing costs. If you’re cash poor this could be an attractive offer; however, you will end up paying back a great deal more in interest payments over the life of the loan. Obviously the longer you stay in this mortgage loan the more you will pay for the rebate.
Generally speaking, if you plan on staying in your home for at least 5 years, prepaying points on your mortgage is a sound investment. Stay away from negative points as they will hurt you in the long run unless you will sell or refinance within three years. Different lenders will offer you different deals based on the same number of points paid. Be sure and shop around from a variety of mortgage lenders to ensure you get the best deal for your prepayment dollar.
Another option to consider when choosing a mortgage lender is whether or not they will waive escrow on your loan. Many lenders require that the property taxes and homeowners insurance premiums are paid in escrow. Escrow is a third party that makes these payments for you at a premium paid by you. Not paying this premium can be an advantage if you are able to make these payments yourself. Many escrow companies are notoriously unreliable; this can cause a real nightmare for the homeowner. If you have a down payment or prepay sufficient points you may be able to talk your lender into waiving their escrow account requirements.
The final option we’ll discuss here is the pre-payment penalty. This prepayment penalty is a clause in your mortgage contract that gives the lender the right to charge you a fee if you pay the mortgage off before the end of the loan’s term. These penalties usually only apply to the first five years of the mortgage loan; however, it could discourage you from refinancing if a better mortgage deal comes along. If you’re using a sub-prime lender for credit reasons you?ll most likely be stuck with this penalty. If you finance your mortgage with a traditional mortgage lender this is an option you can take to the bargaining table. If you’re not interested in taking this option with your loan you may be able to barter for a lower interest rate by accepting the pre-payment clause.
Remember, bartering for options on your mortgage is completely negotiable. It pays to be a shrewd consumer; this is true whether you’re shopping for a refrigerator or a home mortgage loan.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
