12 September 2007
Foreclosure doesn't just happen to people who don't make their mortgage payments. Your homeowner's association (HOA) can take your house or condo if you're not careful. In one case, a disabled California man lost his home in a foreclosure sale because he was $123 behind on his homeowner's dues. The house was worth $280,000. Unfair? Abusive? You bet!Read More »
The How-to-Refinance Toolkit: Apples-to-Apples Rate Comparisons
By Richard BarringtonNFNS Columnist
One of the most
important aspects of knowing how to refinance successfully is making
apples-to-apples comparisons between mortgages.
Why is this so difficult? The natural tendency is to compare
interest rates, yet interest rates are only one component of total mortgage
costs. Try to make an apples-to-apples comparison by analyzing your Truth-in-Lending
disclosure forms and knowing the loan’s Annual Percentage Rate (APR). Both are
essential for your how-to-refinance toolkit.
Rates, Points, and
Other Costs
Not all interest rates are created equal. They can come with
different fees and points charged upfront by mortgage lenders, and these
expenses can vary.
Points are paid upfront to the mortgage provider, and borrowers
may choose to pay points in return for better terms or a lower interest rate:
This is called "buying the rate down" in the lending industry. One
point equals 1 percent of the loan amount, so for a $100,000 loan one point would
cost $1,000. However, that lower interest rate isn't necessarily cheaper -- it
depends on how much you're paying to get it.
Using APRs
Understanding annual percentage rates is vital to knowing how to refinance successfully.
The APR is a calculation of what you are really paying for your loan, factoring
in interest rates, fees, and points. You’ll see it expressed as an interest
rate, but it will almost always be higher than the loan’s stated rate. When
comparing APRs between loans, make sure that you are comparing the same loans. An APR comparison between a
3/1 ARM, or an adjustable rate mortgage, and a 15-year fixed loan will be
meaningless.
The key is to use APRs to make the most accurate comparisons
between prospective mortgage lenders. However, when you are measuring what you
would save by refinancing an existing mortgage, keep in mind you've already
paid the upfront costs. Be sure to compare the stated interest rate of your
existing mortgage against the APR of a potential mortgage.
About the Author
Richard Barrington is
a freelance writer and novelist who worked as investment industry executive for
over twenty years.
About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.