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FINANCING YOUR HOMEUNIT 5, LESSON 3
ORCUTT ACADEMY HIGH SCHOOL
FINANCE & ACCOUNTING
Adjustable vs. Fixed-Rate
30-year vs. 15-year
Finding a Lender
Points & Interest Rates
PREVIEW
Lesson 3.1
ADJUSTABLE-RATE VS. FIXED-RATE30-YEAR VS 15-YEAR
15-YEAR VS. 30-YEAR15-year 30-year
Pay off faster, Build equity faster Takes longer to pay off
Higher payments Lower payments
Lower interest rate (about ½ percent)
Higher interest rate
If you don’t plan on investing, it is better to pay off your mortgage faster
Alternative uses for saving investing
FIXED-RATE MORTGAGES
Interest rates never change
Monthly mortgage payment does not change
No uncertainty
BUT… if interest rates fall (and you can’t refinance), you are stuck with your higher-cost mortgage
ADJUSTABLE RATE MORTGAGES• 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 BETWEEN FIXED 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 an
adjustable-rate mortgage, don’t take it.
CHOOSING BETWEEN FIXED AND ADJUSTABLE• Consider how long you plan to keep the mortgage
• Adjustable rate mortgages have lower interest rates for the first few years.
• Wise if you plan on keeping your mortgage less than 5-7
Lesson 3.2
FINDING A LENDER
SHOPPING FOR A LENDER 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 staff generally understand the specifics of local properties
• Find mortgage companies in cities across the country
HIRING A MORTGAGE BROKER• Brokers
• Submit the home buyer's application to one or more lenders
• Work with the chosen lender until the loan closes• Can often find a lender who will make loans that a bank
refuses• May be necessary for problem credit
MORTGAGE BROKERS
Get paid a percentage of the loan amount
• typically 0.5-1%
Ask your mortgage broker what his cut is
The broker should shop among lenders to get you a good deal
Help you fill out documents lenders demand before giving you a loan
BEWARE• Some brokers place their business with the same lenders
all the time, those usually don’t offer the best rates
• You can shop on your own, so you can compare with what your broker tells you
• Thoroughly check a broker’s references before you do business with them
• Make sure you ask who the lender is—most brokers refuse to reveal this info until you pay a certain amount to cover the appraisal and credit report
Lesson 3.3
POINTS AND INTEREST RATES
POINTS• The initial fee charged by the lender, with each point being
equal to 1% of the amount of the loan.
THE SEESAW EFFECT• As points go up, the interest rate goes down. As points
go down, the interest rate goes up.
• It is important to consider both the points and the interest rate when comparing two mortgage loans.
COMPARING MORTGAGES
EXAMPLE: Compare the two loans. Identify when the loans will have the same cost and which loan will have a lower cost after the identified time period.
Loan #1: 3% interest rate, 2 points
Loan #2: 4% interest rate, 1 point
= = = This formula tells you when the loans will have the same cost. After the given time period, the loan with the lower interest rate will have a lower cost, so…
After one year, Loan #1 will have a lower cost.
GETTING THE BEST RATE
1. Why is it financially wise to make a down payment of at least 20 percent of the purchase price of the property?
2. Why would you choose a fixed-rate loan? An adjustable rate loan?
3. Why should you consider both the interest rate and the points of a loan when shopping for a loan?
ESSENTIAL QUESTIONS
WHAT ARE YOU LEARNING? WHY ARE YOU LEARNING IT? HOW WILL YOU USE IT?