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First of all, what are points? In simple terms, points are paid by a borrower to a bank to lower the rate on a mortgage. A point represents 1% of the face value of the mortgage. A $100,000 requires a $1,000 payment for one point.

Lenders take these upfront payments to lower the long term cost of the mortgage. Each lender has a different formula for calculating the value of points, but one example would be if you had to pay one and a half points to lower the interest rate of your mortgage from 6.25% to 5.875% or pay 2.75 points to reduce it to 5.375%.

The longer you will live in the home, the more sense it makes to pay points; you also have to decide whether you can afford to pay the points. If you need to borrow to pay the points, you will probably lose any advantage since you will have the additional interest. First time home buyers frequently will not find it advantageous to pay points, since many do not stay in this home for long.

Points can be viewed asan investment in the loan. Let?s say you?re considering paying 1.5 points to get a reduction in your home loan rate from 6.00% to 5.50%. You are paying a part of your interest in advance, effectively.

There are many sites on the internet that will help you calculate how much you can save in monthly hhome loan payments by paying upfront points, based on the length of the loan or you can take the easy way out and call a mortgage professional to do it for you.

The $100,000 loan we are discussing would require $1,500 in points to lower the rate to 5%. What is the breakeven point in this situation, based on the different rates? The monthly payment for a 15 year 5.5% loan is 599.55 a month. The monthly payment for a 30 year. 5.5% loan is $567.79 a month.

Since the lower rate saves $31.76 per month, you have to at this point compare that to how much the upfront payment in points cost you. If you divide your investment of $1,500 by your savings of $31.76, you will see that it will be 47.23 months for you to recoup the investment. That makes the decision simple; if you do not plan on being in your home at least 47.23 months, the points do not give you any advantage.

After that, of course, you save every month for the balance of the mortgage. If, a very big if in today?s mobile society, you lived in your home for the full thirty years of the loan, and multiply the $31.76 per month savings over thirty years, you would save $9,933.58 over the entire term of the loan!

When you make your monthly mortgage payment, part of it goes to pay the bank its interest, and part of it is used to pay off the loan. That?s the way a normal mortgage should work. But there exist now new types of mortgages that only pay the interest.

This means that if you pick an interest only option, each month you pay your mortgage, the loan balance stays just the same; it never gets lower. Just about all mortgages allow you to pay off a higher balance than the minimum, and interest only loans are no different; you can pay more if you like.

There may have been some rationale to this type of loan when property prices were increasing dramatically, since the borrower would be guaranteed some equity because of the increased home price. Normally, equity in a property is gained by a combination of paying off the principal and rising home values.

Today?s falling housing market means that borrowers can no longer count on an automatic increase in their house?s value. There are situations where interest only loans are a good solution. But it should definitely only be used as a temporary solution.

A good example would be if one partner to the home loan was attending school and the other was employed. Since, in theory, the student would eventually complete his studies and get a good job, keeping the mortgage payment low during this period and ramping them up later makes sense.

Another example would be where the borrower has income that fluctuates greatly from month to month. An example of this could be someone who did project work and was only paid at the end of each project. Keeping payments low in the months when income was low and then paying additional equity when the windfall came would be a sensible decision, as long as the discipline was there to make the additional payments.

But eventually, the homeowner should make sure that those principle payments get caught up on. You want to make sure that you pay down some of the mortgage so that you will have some equity built in the home, since you can no longer count on housing market increases to do it. If you only pay the interest each month, you will never reduce the principle, and if the home sales price is lower than the home loan, you will not be able to pay off the loan.

Of the many decisions you try to make correctly when you are deciding on a home loan, timing the interest rate may be one of the biggest. Those who think rates will increase want to buy sooner and take advantage of currently lower rates, and those who think they will go down want to wait until a more opportune time.

How are these interest rates determined in the first place, and will understanding this help in the decision making process? The price of money is interest rates, so if you understand what will affect the price of money, you will know better what affects interest rates, which includes your home loan rate.

The most important predictor of interest rates is inflation. There are two major things to watch when it comes to inflation. These are the PPI and the CPI, the producer price index and the consumer price index.

The Producer Price Index (PPI) measures the changes in producers producers need to pay to produce items. Consistently rising PPI, which raises prices of finished goods, will render all goods more expensive and lead to inflation.

CPI is the measure of the change in prices at the consumer level, measured as a group of goods. Most people are more familiar with CPI because it more directly affects what they pay for goods. Certain segments of CPI can ?skew? the percentages, so analysts frequently remove changes in food and oil prices, which can be too volatile. What remains is considered the ?core? inflation rate which is a superior indicator of overall prices and inflation.

GDP is another relatively good predictor of inflation as well as interest rates. Central banks try to foster slow, steady growth in the economy, since zero growth means recession, and too fast growth will lead to inflation. The Fed therefore intervenes and when the economy is growing too quickly, it will raise interest rates to slow the economy down, or conversely, lower interest rates to stimulate the economy for more growth.

The unemployment rate also has an influence on interest rates. Low unemployment is thought of as inflationary since employers have to chase after too few candidates, and will increase wages to do so. If unemployment is high, the resulting decreased wages will mean inflation will be down. Higher wages lead to price spirals and lower wages lead to prices falling.

The prospective home purchaser can help himself by keeping an eye on these indicators to try to determine rates. The bigger picture to watch out for is a lower GDP with unemployment which leads to lower rates. On the other hand, increasing GDP and decreasing unemployment will signal an increase in interest rates.

Worrying about what kind of mortgage you want to take is difficult enough, without having to decide on which interest rate index is going to be the deciding factor on what your interest rates on your Adjustable Rate home loan will be!

When we talk about the index for the ARM, we are talking about the instrument that the adjustments to the loan rate will be tied to. Indices used include the CD rate, the Treasury Bill rate, the Fed Funds rate, the LIBOR rate and, the newest.

You must initially understand that an ARM is a mortgage with an interest rate that moves up or down within a certain set period, and the movements are predicated upon the movements of the underlying index. If your index is CDs, and CDs go up, your interest rate goes up. ARMS also contain adjustment caps, so that you can limit your exposure as to how high your loan rate can go, even if your index rate continues to increase, which is good if you just had a change, and the rates increase again. By the same token, if your adjustment is scheduled to take place immediately after the CD rate increased, you will have that rate for a while, even if the CD rate is lowered in the interim.

There are a large number of ARM indices, including the CDs, LIBOR and government bonds mentioned. The Fed Funds rate is another very popular basis for ARMs. Another popular index used by a lot of lenders is the LIBOR, or the London Interbank Offered Rate, which well rated international companies pay to borrow.

The index is a personal choice, based on the individual loan, and how the borrower feels interest rates will be heading. If you would like a rate that is responsive to the interest rate market, you would choose the CD rate as your benchmark. Rates on Treasury instruments such as the Treasury Bill move more slowly than CDs, and so will react more slowly to interest rate changes. LIBOR is the index that moves the most often and the most rapidly, so if you want to take frequent advantage of the downward level of decreasing rates, this is the index for you.

An option ARM is one where the interest rate adjusts monthly and the payment adjusts annually, and the borrower is offered an “option” on how large a payment he wants to make. The mechanism behind these loans is that they are interest interest only loans, so you have to pay that minimum, and then you can choose to pay more. Be warned that minimum payment option can end up in an increasing, rather than decreasing mortgage, a phenomenon known as negative amortization.

With all of these choices, a potential borrower should really talk to a professional mortgage broker who understands the various products and can help you choose the best one for you.

Not all mortgages are created equal, and once you start shopping for a mortgage, you will quickly find that there is a mind boggling assortment of types of mortgages.

One of the first decisions you will have to make is whether you prefer a fixed rate mortgage or an adjustable rate mortgage. Usually, a fixed rate mortgage will be at a higher rate than an adjustable rate loan. This is because the banks have to make up for the issue that interest rates may move against them. So the banks have to build in a cushion in case of increased rates.

In a lot of cases, a fixed rate home loan is the better choice because of the interest rate protection it gives the borrower. But there are instances when this is not a good idea, for instance if you are not going to live in your house for a long period. It will take a minimum of five years to level out the higher initial interest rates.

Anyone who believes they will be in a home for less than 10 years is probably better off with a lower, adjustable rate home loan. The mortgage will be lower, and since you will be paying down the mortgage relatively soon, you would have to face higher interest rates in any case, if they occurred.

But now, to add more confusion to the home loan market, the borrower has to choose the index that his adjustable mortgage will be based on, what the adjustment cap willbe and what the maximum interest rate will be.

Lenders will also offer borrowers a lock in period, so it is important to know how soon you are going to be buying a house. A lock in period will guarantee the rate for a certain period of time. The rate will be decided by the length of the lock in period-the longer that period, the more the rate.

Now you have to decide upon your down payment. Most people put down whatever they can scrape together to qualify for the home loan. But many people do have additional cash, and they have to decide if other investment options would be a better use of those funds.

The next option a borrower has to decide upon is how many points he wants to pay so that he can lower the interest rate. Paying up front points will not be worth while if the loan is not going to be outstanding for a very long time.

Choosing among all of these options can literally make your head spin. With all of these types of loans, and new ones being brought on the market almost every day, such as interest only loans and options based loans, it is no wonder today’s borrower is confused.

The difference between a first and second mortgage is simple. A first mortgage is taken out for the purchase of the home, while a second mortgage is taken out on any residual value between the outstanding loan balance and the value of the home.

Usually, homeowners will take out a second mortgage to undertake some renovations or improvements to the property, but increasingly, people are using the equity in their homes to reduce or eliminate their high rate consumer debt.

The only time it really makes sense to take out a second mortgage for home improvement is if the improvement is going to add to the value of the home. There are some projects that are considered more valuable in the eyes of homebuyers, such as additional bedrooms or a remodeled ktchen, that will make them willing to pay more for the home.

Some home improvements, however, are nothing more than luxuries and will not affect the future value. An in ground pool is an example that is frequently used, since there are many buyers (with young children, for instance) who would not care to have one.

Today, it is considered a wise financial move to reduce or eliminate high consumer debt and replace it with lower rate debt taken from the increased value of the home. If you have credit card rates of 10 to 20%, which are not uncommon, you will save a lot if your second mortgage is in the 5 to 9% range.

Make sure, however, that the cost of the new debt is balanced by the benefit received. Either the value of the home should increase to an extent that makes the loan cost worthwhile, or the savings from your credit cards should equal the cost of the loan.

Unlike a first mortgage, a second mortgage will not have priority on your home if you default. The first mortgage on your home would be repaid by your home’s value before any funds go toward the second mortgage.

This is the reason that rates on second mortgages are higher than on first. The bank that holds the second mortgage risks that the proceeds of the home in case of default will not be enough to cover the loan. Since risk is one of the most important determinants of rates, this higher risk increases the rate.

There are closing costs with second mortgages just as there are with first mortgages. Make sure you are fully aware of all of the closing costs you will have to pay for loan, so that you can be sure the total cost of the loan balances the increased value of the home or the savings on the credit cards!

Rates on second mortgages can vary a great deal, so it really pays to shop around, not only for the base rate, but also for the lowest package of closing costs. Since the loan amount of a second mortgage is typically not as high as a first mortgage, small differences in rates and costs can have a proportionately higher effect on the cost of the loan.

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One of the surprise expenses for most first house buyers is the total closing costs. Many times, people may be tempted to re-negotiate their older, higher rate mortgage when rates come down. It is important to consider this carefully and make sure any savings you have are not eaten up by the closing costs on the loan.

When a bank establishes a mortgage, there are expenses to do so. Needless to say, the bank is not going to absorb these costs, but rather pass them on to the borrowers. (Although, in competitive loan markets, lenders have used lower closing costs as a factor to attract new borrowers, by absorbing part of the fees.)

or inspections -Title search -Credit report

There may be taxes and other fees by the state as well.

As a prospective re-financer, you may want to know which of these fees can be reduced, or even eliminated, such as their application fee, and which are not under the bank’s control. As we mentioned, sometimes lenders are aggressively seeking new clients, and they may have special programs where certain fees are waived. The application fee is the most often waived, since this is a charge the bank itself makes. Other fees, that are just pass-through fees, such as attorney fees or appraisal fees are not likely to be waived.

One of the first steps you should take is to get a good faith estimate of the closing costs. Then you can analyze them. One of the dangers of being offered a lower rate may be that the bank inflates the closing costs to make up for the lower loan rate.

If you do find that any of the costs are not in line with market rates (you can call another bank and ask them what their fees are-this will apply in some areas, such as an appraisal or a credit search, or you can file another application and get another good faith estimate), call them on it and request to negotiate the item.

After you have negotiated lower closing costs as much as you can, you should now make sure the deal is worth it. Mortgage calculators are available on the net, and you can calculate the total cost left on your present loan and the total cost of the new loan.

This is not too difficult, since you just have to enter the numbers for your present mortgage, and the new mortgage you are thinking about, adding the closing costs, of course.

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Once you start considering buying a home, the first thing you may be concerned about about is how good a rate you will be offered.

And once you know how those rates are determined, is there anything you can do to get the best rate for your mortgage?

The most critical determinant of the interest rate you will be quoted by the lending institutions is your credit score. If you have heard discussions, or seen constant ads on the net about your “FICO” score, you may now what the buzz is about.

A FICO score is a rating that credit agencies such as Equifax put on any person who requests credit. If you have high income, with a steady job, and have never had any problems paying back any loans, you will have a good FICO score.

The next determinant that will influence your interest rate is the size of the deposit you are putting on your home.

First of all, you are putting your own funds into the project; this gives the bank confidence that you are confident enough in paying back the loan that you have committed sizeable upfront funds as a down payment.

Consequently, the higher the deposit you are willing to make, the better the rate will be deposit. If you consider that your rent payments could be mortgage payments increasing equity if you had a home, you would want to buy as quickly as possible.

The “term” of the mortgage is also an important component in how rates are determined. If a bank has to commit for a longer period, they are going to price that additional exposure into the loan rate.

Taking a shorter maturity on your mortgage, such as a five year loan instead of a 25 year traditional loan will result in a lower rate for you. But for the homeowner, it may be worth the time to take the higher rate and not have to worry about increases.

And here is another factor that will determine interest rates, one you can do nothing about: that is the interest rate market. Banks have to get their money from other sources, so the more they have to pay to obtain money, the more they have to pay to lend it. If general interest rates are rising, mortgage rates will rise. These market rates are set according to complex economic indicators.

Most people would rather take a chance on a fixed rate that can’t increase, than a rate that changes periodically. Even if rates go down, they feel the risk is better to have a locked in rate than a changing rate.

Another factor that has an influence on the rate of your mortgage is the size of your loan. Banks are limited as to the size of their loan portfolio, and if your mortgage is sizeable, they will be adding a lot of risk to their portfolio and will expect a higher return for that higher risk.

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Discount points are not an easy topic for many new borrowers. The basic explanation of paying discount points is that you are paying part of your interest to the bank in the beginning in order to lower your mortgage payments later on, during the course of the mortgage. When the rate is lowered, so will the monthly loan payment.

When lenders talk about a point, they mean 1% of the total loan. If you are obtaining a $200,000 mortgage, one point would be $2,000 at closing. A borrower has the choice of paying one or more points on the mortgage.

As anyone who has been shopping for a loan knows, one’s credit rating determines the loan rate, and then the point reduction is taken off this rate. For example, if the original rate quote is 6%, according to your credit score, ask how much it will be if you are willing to pay any points. A general rule, but one that can change from bank to bank, is that one point will lower the mortgage rate .25% on a fixed rate loan and .375% on an adjustable rate loan. In discussing our example of a $200,000 loan, above, let’s say we want one point, that is, to have the loan rate reduced to 5.75% of 5.635%, depending on whether it is fixed or adjustable.

Most banks will give mortgage interest rates with optional points alongside. For example, the lender may list the rate as 6%, no points, 5.75%, one point, 5.5%, two points, etc. Then the quote would show 7% with the pertinent reductions. So it is important to realize what the rate you will pay without points is to be able to find the rate you will have with points.

It is clear that a monthly mortgage payment will be lower with a loan of 5.75% than with a loan of 6%, but you have to take into account the points. This sounds like it would always be a good investment, but you have to keep in mind that you are basically paying interest up front. This is why it is important to look at points with a view to how long you think you’ll be living in the house. Paying points is only a good idea for those who plan on holding the loan for quite a while.

Since a home buyer is going to have a lower loan payment, this usually means that he can afford to pay more for a home. A seller may advertise “seller pays points” to bring in more buyers. But keep in mind that this may raise the price of the home by the amount of the points.

It is important to note that there is absolutely no obligation on behalf of the borrower to pay points. It is a completely voluntary decision based on his analysis of the costs involved.

Many borrowers are not aware, but they can pick a payment option for their mortgage that makes it easier to pay because it suits their needs. Making the payment easier will make it more likely it will be paid, and paid on time.

If you are the kind of person who doesn’t get the check out on time only because of your busy schedule, make sure you look into online bill payment, or even better, automated deduction. Of course, you still have to make sure you have the money available, but if that is not the issue, and you are usually late simply because of not finding the time to sit down with your checkbook, these are ideal solutions.

You might even find an additional benefit, since many lenders will lower the interest rate on a mortgage if the loan is automatically deducted. Their processing costs can be lower, and they are guaranteed that the loan will be paid, so they can pass some of those savings on to you.

Other homeowners may budget the monthly mortgage but then find the account short when they have to pay the mortgage. Even when you try to keep one half of the mortgage aside with your first paycheck, you may see the amount dwindling when the check is due. Many homeowners prefer to pay half their mortgage at the start of the month, and the other half at the middle of the month.

Matching the due dates of their mortgage with the receipt dates of their paychecks helps many people budget their mortgage better. In addition, they ar able to save money over the life of the loan since they are lowering the loan balance more quickly than they would with the usual monthly payment.

Another product that banks offer is an option mortgage, which means the borrower can pay just what he wants to on his home loan. Although this is extremely convenient, it is important to manage this option carefully. There is normally a minimum amount due which is the amount of the interest due, and then the borrower pays anything (or nothing) above the interest. Making the minimum payment all the time will mean that you will never have the chance to lower your principal.

This can be a good solution for earners with fluctuating income patterns, such as someone who works on projects, or a building contractor who gets a lump payment on completion. This will only work for those individuals who are disciplined enough to pay the larger amount when the funds are available.