FINANCINGYOUR HOMEUNIT 5, LESSON 3ORCUTT ACADEMY HIGH SCHOOLFINANCE & ACCOUNTING
Adjustable vs. Fixed-Rate30-year vs. 15-yearFinding a LenderPoints & Interest RatesPREVIEW
Lesson 3.1ADJUSTABLE-RATE VS. FIXED-RATE30-YEAR VS 15-YEAR
15-YEAR VS. 30-YEAR15-year 30-yearPay off faster, Build equity faster Takes longer to pay offHigher payments Lower paymentsLower interest rate (about ½percent)Higher interest rateIf you don’t plan on investing, it isbetter to pay off your mortgagefasterAlternative uses for savinginvesting
FIXED-RATE MORTGAGESInterest rates never changeMonthly mortgage payment does not changeNo uncertaintyBUT… if interest rates fall (and you can’t refinance), you arestuck with your higher-cost mortgage
ADJUSTABLE RATEMORTGAGES• Interest rate varies over time• Can change yearly, or even monthly• Most often, every 6 or 12 months• Monthly mortgage payment fluctuates• Advantage: Potential interest savings• Lower rates for the first few years• After that, your rate depends on overall trends
CHOOSING BETWEENFIXED AND ADJUSTABLE• Consider your ability to take on financial risk• Reliability of income• Job security• Emergency savings• Future expenses• Stress level• If you can’t afford the highest allowed payment on anadjustable-rate mortgage, don’t take it.
CHOOSING BETWEENFIXED AND ADJUSTABLE• Consider how long you plan to keep the mortgage• Adjustable rate mortgages have lower interest rates for thefirst few years.• Wise if you plan on keeping your mortgage less than 5-7
Lesson 3.2FINDING A LENDER
SHOPPING FOR ALENDER ON YOUR OWN• Large banks usually don’t offer the best rates• Check out smaller lending institutions• Using a local bank can sometimes be a plus. Their staffgenerally understand the specifics of local properties• Find mortgage companies in cities across the country
HIRING A MORTGAGEBROKER• Brokers• Submit the home buyers application to one or morelenders• Work with the chosen lender until the loan closes• Can often find a lender who will make loans that a bankrefuses• May be necessary for problem credit
MORTGAGE BROKERSGet paid a percentage of the loan amount• typically 0.5-1%Ask your mortgage broker what his cut isThe broker should shop among lenders to get you a good dealHelp you fill out documents lenders demand before giving you aloan
BEWARE• Some brokers place their business with the same lendersall the time, those usually don’t offer the best rates• You can shop on your own, so you can compare with whatyour broker tells you• Thoroughly check a broker’s references before you dobusiness with them• Make sure you ask who the lender is—most brokers refuseto reveal this info until you pay a certain amount to coverthe appraisal and credit report
Lesson 3.3POINTS AND INTEREST RATES
POINTS• The initial fee charged by the lender, with each point beingequal to 1% of the amount of the loan.
THE SEESAW EFFECT• As points go up, the interest rate goes down. As pointsgo down, the interest rate goes up.• It is important to consider both the points and the interestrate when comparing two mortgage loans.
GETTING THE BEST RATE
1. Why is it financially wise to make a down payment of at least20 percent of the purchase price of the property?2. Why would you choose a fixed-rate loan? An adjustable rateloan?3. Why should you consider both the interest rate and thepoints of a loan when shopping for a loan?ESSENTIAL QUESTIONSWHAT ARE YOU LEARNING? WHY ARE YOU LEARNING IT? HOW WILL YOU USE IT?