Finance: Mortgages

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Mortgages can seem deep and mysterious. But truly, they are not. Mortgages are made all the time. You almost never hear news of dishonest financiers, per se. On the contrary, many institutions and people are standing by to help you own your own home. While almost none will gyp the prudent buyer, you can drive a truck through the number of deals you can make.

What I present here is a simple way to make sure your mortgage is on track.

Who this page is NOT for

If you have poor or unestablished credit, something weird with your current mortgage (under water), or you cannot present a clear picture to your lender, this page is not for you. You can contact me to try to help, but I am not any kind of pro. I'm just a guy who understands how things work for straightforward situations. If you read this page, you know as much as me.

Who this page IS for

If you have a good handle on your money, and a decent credit history, then make sure you understand my points here. Whether you do exactly what I say doesn't matter. You will be a smart investor if you are on top of these points. I don't proclaim to be the best mortgage advisor. You only need to know a few important points to avoid missteps that could cost you tons of money.

Current finance rates

The world of mortgage rates is not some big unknown that ordinary people can't handle. In fact it's a graph right in front of you right now, like this one on Zillow (click on graph to upper right). There are other ways to find good rates. The point is to find some third party competitive overview so you can do a baseline check of your quote. If you are talking to someone who is not within 0.25%-0.50% APR of what you can find competitively online, you must ask them why. And then, don't believe them - call the people who say they can do that better rate, and ask them also. Get at least three quotes, if not more.

Competition is a lovely and terrible thing. Make it work for you. Yes it may be complex to you. But they do it every day. Please understand. To them, it's like mowing the lawn. Done every day. Clients in, clients out. For you, it can also be easy, if you have a handle on the big picture.

There are not big mysterious forces out there to trick you. No, there are people happy to have your business and get you a good rate. As long as you have a handle on it, you will be in a good ballpark.

Finance Fees

These go by many names, but will generally be a few thousand dollars for properties in the $100k - 500k range. When you get to the point of looking real closely at rates, there is a little game of how finance companies will eat some fees relative to your mortgage rate (annual percentage rate, or APR). Keep your eye on the target.

If you want a good deal, you can't be too afraid to breakout a calculator.

Bankrate.com usually has a good one. But it's simple. Click around if they changed its URL again.

The advanced mortgagee will use this one from TimeValue.com:

Factor it all in

TimeValue lets you input your current rate and principal, and figure your new rate versus costs, APR, and even tax bracket and the time value of alternate investments.

For the informed individual, those last two terms are where this calculator frees you to see how your money will really do:

  • Might I be better served investing my money elsewhere? How does my tax bracket affect the results?

If you want to dive deep - which you should, it's only your single biggest investment - your tax bracket and the rate you might make on otherwise investing the money, is critical.

Let's be clear: This is graduate level personal finance. You have to decide if your overall situation allows you to invest in stocks, or in your house.

As of this writing (May 2017), mortgage interest rates are near historical lows. Seriously historic lows. September of last year they hit pretty much the lowest ever in modern history, around 3.25% APR for a U.S. average 30-year fixed rate mortgage. They've risen some since then, but are still really low. It's now around 4%.

Meanwhile, the U.S. stock market has almost universally done 6 to 8% over the long term, defined as letting your money stay in the market 10 or more years in an S&P 500 index fund. So if your mortgage rate is well below that (which it should be), you might consider taking out a 30-year fixed-rate loan instead of a 15-year one, so you can invest the rest instead.

I present a case for a sound strategy of investing in e.g. an S&P 500 Index fund here. It is a simple but wise "fire and forget" thing for a person to do who has little time to spend, but wants to invest well.

If you will only have your house a short time (certainly less than 3 years), ignore the big time-is-money investing idea. Just go with the best mortgage rate plus minimized fees.

Buying Points

As a general rule, I haven't seen any good argument for doing this. Not in the long term and certainly not in the short term. So I advise against doing it, period.

But there will always be a small gray area around the best APR you might get where the lender might offer a little lower APR if you pay a little more fee; an 0.25% or so difference in APR. Here, you will have to make your own call.

How to assess your mortgage re/finance astutely

  1. Get quotes from major quote sites
  2. Play a few of them against each other
  3. Get the best rate you can

Now you know all I do.