• Costs associated with refinancing
• How interest rates affect the cost of a loan
• How points affect the cost of a loan
• Types of mortgages: Fixed Rate and Adjustable Rate
• Building equity in your home

Click above to learn more about each topic

  

The rate, or percentage, at which the money is lent to you (i.e., 8%)

The points, a one-time fee added by the lender (i.e.,  two points)

The application fee charged by the lender to cover credit  report and home 
appraisal expenses (i.e., $350)

Closing costs, including transfer taxes, title insurance, escrow, inspection, 
notary, and so on.

Compare the short-term and long-term impact of a 1% variance on a $200,000 loan:

As you can see, a lower interest rate makes a big difference!

 

 

How Points Affect the Cost of a Loan

• 1 point = 1% of the amount borrowed
  
• Although points are a fee paid to your lender, they also let you "buy" a lower interest rate
  
• As a rule, the more points you pay, the lower your interest rate
  
• One point can "buy" you a 0.25% +/- discount on your rate
  
• Most lenders require you to pay your points up front
   

A Savings Comparison
 

Mortgage	Interest	Points	Cost
$200,000	7.5%	0
$200,000	7.0%	2	2 points = $4,000
Paying 2% of your loan amount could lower your interest rate by as much as 0.5%. This amounts to considerable savings over the life of your loan.

 

Fixed Rate
The most straight forward type of loan. Because the interest rate never changes, you pay the same amount every month until the loan is paid off.

 Adjustable Rate
Because this interest rate fluctuates at predetermined intervals (i.e., every month, every 6 months, every year), it is more complex than a fixed-rate loan. 
 

The term, or length of the loan, is typically 30 or 15 years.

30-year term

This is the most conventional loan term. It allows you to repay slowly, with moderate monthly payments

15-year term

This term allows you to repay twice as fast. Although your monthly payments are higher than a 30-year term (albeit not twice as high), a larger percentage of your payments is applied to principal.

• Term
  1) Usually calculated on a 30-year basis
  2) Starts with a fixed-rate period, then adjusts thereafter, i.e., Fixed for 3 years, then adjusts every year after
  
• Rate
  1) Adjusts at scheduled intervals
  2) Adjusts according to an index, i.e., Treasury Bills, LIBOR, 11th District Cost of Funds (COF), CDs, and so on.
  
• Margin
  1) Percentage added by the lender to the index interest rate
  2) The sum of the rate and margin is the rate you pay, called the fully indexed rate
  
• Other ARM info
  1) As interest rates fluctuate, your ARM payments will vary.
  2) To minimize the risk of extreme fluctuations, caps are imposed on your rate. Caps protect you by limiting the percentage by which your rate can go up.

The rate you build equity depends on how much is applied to principal and how much is applied to interest each month.