FINANCING YOUR HOMEUNIT 6, LESSON 3

ORCUTT ACADEMY HIGH SCHOOL

FINANCE & ACCOUNTING

Adjustable vs. Fixed-Rate

30-year vs. 15-year

Finding a Lender

Points & Interest Rates

PREVIEW

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

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

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?