We hope you find them both educational and interesting to read. If you’d like a particular concept explained, e-mail us with a suggestion and we just may post it!
Pre-Qualification vs Pre-Approval
Last modified on 2009-06-18 10:49:11 GMT. 0 comments. Top.
by Edward Galstyan
So you received a letter in the mail that you’ve been pre-qualified or pre-approved for a loan application. Great. So what does this mean, exactly? Let’s dive right in and take a look.
The terms pre-qualify and pre-approval are typically used in real estate when someone wishes to obtain a loan for the purchase of a property. Think about these two terms in terms of sequence. First, you must be pre-qualified to then be pre-approved. With pre-qualification, your lender does a preliminary evaluation of your ability to pay for a home, providing an estimate of your mortgage amount.
To become pre-qualified for a loan, you must first submit some information to your loan officer: Income, debt level, assets, etc followed by a credit check.
Pre-approval will require you to complete the full loan application and submit all of the appropriate documentation for review by the loan officer. With pre-approval, you may shop for a home with the confidence of knowing exactly how much you can afford. By knowing exactly how much house you can afford, you will avoid wasting the time of the real estate agent, lenders and above all, save yourself time as well. Furthermore, becoming pre-approved first will give you a faster closing period for the loan, and give you better buying power as well because sellers prefer pre-approved buyers.
So get pre-approved, then start shopping for a house. If you have any application stories you wish to share, leave them below!
Mortgage Points Explained — How it may save you money
Last modified on 2009-06-02 09:18:15 GMT. 0 comments. Top.
by Edward Galstyan
So what are mortgage points, exactly?
Mortgage points are sold by the lender when purchasing a house. Mortgage points are also called discount points. The purpose of purchasing mortgage points is to reduce the fixed APR on your loan. For each point you pay up-front, you obtain a lower interest rate. Essentially, purchasing mortgage points is paying interest up-front which then results in a lower interest rate in the long run. The general rule is paying one point results in .125% rate reduction or 1/8th of the overall mortgage rate. Multiple mortgage points may be purchased, depending on the lender.
How much does it cost to purchase mortgage points?
A single point purchase costs 1% of the value of the amount you borrow to purchase a house.
Example 1: You purchase a house for $200,000 and put a 20% down ($40,000) and finance $160,000. The cost for a single point purchase on this transaction would be $1,600 ($160,000 x 1.00%)
Should I purchase mortgage points and is it really worth it?
There are a number of situations which must be considered before purchasing mortgage points.
1.) Whether you can afford to make the upfront payment required to purchase mortgage points. Mortgage points are paid up-front with the closing costs.
2.) The length of time you expect to have the mortgage. Remember, the purpose of purchasing mortgage points is to pay points up-front, which essentially is interest up-front, to save money on interest in the long run. It is a rate buy down option.
Example 2: You purchased a house in example 1 and financed $140,000. Your lender offers you a hypothetical rate of 6.00% fixed over a 30 year period. Your lender also has an option for you to purchase one point (costing $1,400 upfront) but as a result of the point purchase they offer to lower your 30 year fixed interest rate down to 4.875% (the standard 0.125% discount for purchasing a point applied)
The length you expect to have the mortgage matters because in the long run you will save money. You must figure out the break even point.
Let’s say you get an interest rate of 6% on that $140,000 loan. Your monthly payment for principal and interest would be $839.37. If you were to purchase 1 points at the cost of $1,400 that would lower your interest rate slightly to about 5.875% and your monthly payment would then be $828.15 per month, a monthly savings of $11.22.
Now you can use that scenario to determine your break-even point to determine if purchasing points is worth it. First we need to find out how long it will take before you get a return on your initial point purchase. In the example above, you would need to keep that mortgage for at least 125 months or 10 years, 3 months to get your money back. (cost of upfront points DIVIDED by monthly savings EQUALS length to keep loan). Thereafter, you continue to save the $11.22 each and every month because you purchased a point up front.
Also keep in mind that if you refinance ahead of the break-even point, you will lose out since you are getting a new mortgage with refinancing.
Do some planning and calculating to determine if purchasing mortgage points is right for you and it may save you some money — in the long run.
The Rule of 72
Last modified on 2009-06-04 09:39:36 GMT. 2 comments. Top.
by Edward Galstyan
So you’re saving money — care to learn an easy finance trick?
The rule of 72 is an easy way to determine how long an investment might take to double with a given, fixed annual rate of return. To figure out a rough estimate of how many years it will take an investment to double, use the following formula:
Number of years investment will take to double = 72/Given Interest Rate
Let’s try some simple numbers out.
Rule of 72 Interest Rate Number of Years to Double
72 1% 72 years
72 2% 36 years
72 3% 24 years
72 4% 18 years
72 5% 14.4 years
72 6% 12 years
Example: at 6% it will take 12 years for $1 to double to $2 or $100 to double to $200.
You can also move the formula around to figure out what interest rate you must invest in to double your money.
Formula: 72/Number of years = interest rate you need to double your money
Example: You want your money invested to double in 10 years
72/10 = 7.2% Interest Rate to double your investment.
The Bottom Line:
If you want a quick, easy, rough estimate — you may use the Rule of 72
