Little Help please!

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KC_Valentine

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Ok I know this is totally off topic, and not a hard question but for the life of me, i can't figure it out with the points added in.. any help would be much appreciated.. the formula would be the best!


Determine the actual interest rate for an account with mortgage fees such as points that the borrower must pay up front for a $100,000 loan for 30 years with monthly payments of $750.00, a nominal rate of 5%, a 2-point fee, and 5% of the loan paid in advance
 
Well, I'm no mortgage guru but buying into points is nothing more than pre-paid interest. You'd be better to get a low 15 year fixed mortgage rate and pay a little extra on principle each month. You'll save more interest that way than buying into points.

For more information about this visit www.daveramsey.com. Dave Ramsey will tell you everything you need to know about mortgage lending.
 
Well. I AM a mortgage guru...and although Gray is correct that buying points is paying interest up front, it CAN have some distinct advantages. It totally depends on two things. One, what will it cost on the day you lock, and two, how long will you have the mortgage? Points typically see their costs recovered in approximately 3 years. Any more than that and you're paying too much for what you receive. So after 3 years, you are money ahead. But if you only plan on having the mortgage for a few short years, you don't gain anything. Another issue to consider is points are deductible on your taxes. Therefore, if you are in need of this tax advantage in the year you buy your home, it is an additional benefit. This however is NOT the case on a refinance. Those points must be amoratized over the length of the loan. See your CPA for proper advice.

In your question above, I THINK you're looking for the APR if I understand your question correctly. This is Reg Z...also noted as a Truth in Lending. It isn't the best document in the world due to it's manupulative abilities by unscroupulous lenders. However, it does give you a direct relationship of costs vs interest rate. Your 5% of the loan paid up front makes no sense to me whatsoever. Are you saying you're putting 5% down on the house? That's not prepaying the loan. That's your down payment.

By the way, your interest rate IS YOUR INTEREST RATE!! If you get a 5% rate, then that's what it is for as long as the term you agreed to. No amount of fees and points can change that. However, the APR is an indicator of what that interest rate is going to cost you...and it is not necessarily over the length of the loan. Let me see if I can explain it to you like this...

If you buy a TV from me for $1000 and I agree to finance 100% of it for you for one year at 5%, at the end of that year, you will have paid me $1050. Your interest rate and your APR are both 5%. But...if I were to charge you $25 to come out and set that TV up when you bought it, then at the end of the year, you would have paid me $1000 for the TV, $50 interest, and $25 set up fee for a total of $1075. Therefore, your interest rate would have been 5%, but your APR would be 7.5%. As you can see, APR and interest rate do not necessarily have anything to do with each other than to show you costs involved with the transaction. Where is should make you take notice is when the APR is significantly higher than the interest rate. In that case, I would want to know why and look closely at what's going on.
 
2001LS8Sport said:
Well. I AM a mortgage guru...and although Gray is correct that buying points is paying interest up front, it CAN have some distinct advantages. It totally depends on two things. One, what will it cost on the day you lock, and two, how long will you have the mortgage? Points typically see their costs recovered in approximately 3 years. Any more than that and you're paying too much for what you receive. So after 3 years, you are money ahead. But if you only plan on having the mortgage for a few short years, you don't gain anything. Another issue to consider is points are deductible on your taxes. Therefore, if you are in need of this tax advantage in the year you buy your home, it is an additional benefit. This however is NOT the case on a refinance. Those points must be amoratized over the length of the loan. See your CPA for proper advice.
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Well, I disagree that if you are looking for a tax deduction getting in debt for it is not a wise thing. However, if you are buying a house anyway then it does have its advantages. Also, variable mortgage rates are definitely the wrong thing to do if you are looking at a long term mortgage. Fixed is the best way to go.
 
GrayGhost1 said:
Well, I disagree that if you are looking for a tax deduction getting in debt for it is not a wise thing. However, if you are buying a house anyway then it does have its advantages. Also, variable mortgage rates are definitely the wrong thing to do if you are looking at a long term mortgage. Fixed is the best way to go.
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Gray, getting in debt for a house is a GOOD debt. I see hundreds of credit reports a year. All things being equal, credit scores are always higher with a mortgage than without. Revolving debt will kill credit scores...even if you have never, ever missed a payment.

Variable and interest only loans have their place. They are not for the normal home owner...but they have distinct advantages over fixed rate loans in certain situations. I have a good friend who does most of the mortgages for the Denver Broncos and a few other professional athletes. EVERYTHING he does is an ARM. When you look at that much money, the difference in interest rate on an ARM vs fixed makes such a huge difference in the payment that they can afford to refinance the thing two or three times and still be money ahead. All my Private Client customers buying 7 figure homes choose an ARM for the same reasons. But for the younger less afluent buyer, you're right. The security of being fixed is for the best. However, remember this...the average length of a mortgage in this country is 5 years! Amazing, huh.
 
2001LS8Sport said:
Gray, getting in debt for a house is a GOOD debt. I see hundreds of credit reports a year. All things being equal, credit scores are always higher with a mortgage than without. Revolving debt will kill credit scores...even if you have never, ever missed a payment.

Variable and interest only loans have their place. They are not for the normal home owner...but they have distinct advantages over fixed rate loans in certain situations. I have a good friend who does most of the mortgages for the Denver Broncos and a few other professional athletes. EVERYTHING he does is an ARM. When you look at that much money, the difference in interest rate on an ARM vs fixed makes such a huge difference in the payment that they can afford to refinance the thing two or three times and still be money ahead. All my Private Client customers buying 7 figure homes choose an ARM for the same reasons. But for the younger less afluent buyer, you're right. The security of being fixed is for the best. However, remember this...the average length of a mortgage in this country is 5 years! Amazing, huh.
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Well, DEBT is not good period!! I want a low beacon score because that means I have no debt! Now if there was a debt to be had then a mortgage is ok. Not too many people can buy a house with cash. However, I would suggest that you listen to Dave Ramsey this week on this daily radio show. The paid off home mortgage IS taking the place of the BMW as new status symbol in America! To have a good beacon score you need to have debt, show a history of debt and have all debts paid current.

Do me a favor, just listen to Dave for one week. It will change your approach on debt and the meaning of it especially coming from the lending side of the business. Also, you as a mortgage guru may be a bit bias and getting non-biased advise can sometimes be good.

I'm not trying to spark a debate but people with debt are normal. I don't want to be normal. I live like no other now so that I can live like NO OTHER later in life.
 
Thanks for all the responses guys. I was askin cause my friend has this accounting class where the takehome test had that question. I was a little drunk last night and trying to help over AIM wasn't doing him much good. It was a oddly worded question so I figured I would ask out here since I know we have a very intelligent crowd. I had a few online mortgage calculators going but I wasn't for sure if it was asking for APR or what. Thanks again for the responses I really appreciate it! =)
 
GrayGhost1 said:
Well, DEBT is not good period!! I want a low beacon score because that means I have no debt! Now if there was a debt to be had then a mortgage is ok. Not too many people can buy a house with cash. However, I would suggest that you listen to Dave Ramsey this week on this daily radio show. The paid off home mortgage IS taking the place of the BMW as new status symbol in America! To have a good beacon score you need to have debt, show a history of debt and have all debts paid current.

Do me a favor, just listen to Dave for one week. It will change your approach on debt and the meaning of it especially coming from the lending side of the business. Also, you as a mortgage guru may be a bit bias and getting non-biased advise can sometimes be good.

I'm not trying to spark a debate but people with debt are normal. I don't want to be normal. I live like no other now so that I can live like NO OTHER later in life.
Click to expand...

Gray...a low FICO is not what you're after. If you ever want to borrow money for a car, etc....that low score will give you a worse interest rate, terms, etc. It's admirable to try and reduce your debt load...and desirable. But a mortgage is one debt that over 99% of the homeowners in America will have. There just aren't that many people who can afford to pay cash for a house. And believe it or not, it's not good ecomonic sense to do so if you have the cash. Your money will make you as much or more than the interest you pay on a mortgage. Plus it's deductible. The guy you talk about is just another in a string of "salesmen" who are out preaching their agenda. It's not for everyone. As a matter of fact...it's not for many. But believe me...I will bet you whatever you want that I see more credit reports than he does. I know what debt is good...and what is bad...and what drives credit scores. And by the way, your highest credit scores are those that have very little debt other than a mortgage and a car. They have no revolving debt to speak of. And they have a history of paying their bills on time. To reach 800 scores, it usually (note I said usually) requires a long history of controlling your debt. It's very unusual to see that until people reach their 40's and beyond...but not unheard of sooner.

Excellent discussion Gray! And I hope I'm not biased. There are many times I recommend that people NOT get a mortgage...or any other debt. I work for one of the largest banks in the country...and the highest rated bank on Wall Street. Our lending practices speak for themselves.
 
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