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Paying Points on Your Mortgage

One way to lower your mortgage payment is “paying points” on your mortgage. This means to buy down the interest rate for the life of the mortgage with discount points at closing. A discount point is one percent of the mortgage borrowed. Lenders collect this fee up-front to increase the yield on the note in exchange for a lower interest rate.

Two other commonly used ways to lower your mortgage payments are to make a larger down payment (especially if it eliminates private mortgage insurance) and improve your credit score before applying for a mortgage. However, you may get additional benefit from paying points on your mortgage

Here’s an Example

Let’s look at two options on a $315,000 mortgage for 30 years at 4% interest with no points compared to a 3.75% interest rate with one-point. The principal and interest payment on the 4% loan is $1,503.86. Compare this to $1,458.81 on the 3.75% loan.

The $45.04 savings is available because the buyer is willing to pay $3,150 in points. By dividing the monthly savings into the points paid, you can determine the breakeven point. In this example, if the buyer is plans to stay in this home for at least 70 months, they would recapture the cost of the discount points. Each month after that would realize savings.

Accelerating Amortization and Tax Benefit

Another interesting thing to consider is that lower interest rate loans amortize faster; in other words, they build equity faster by paying off the loan sooner. If the buyer stayed in the home for 10 years, their unpaid balance in this example is $2,117.38 lower than the 4% mortgage. Combine that with the $2,259.29 in savings from the breakeven point to the end of 10 years and the buyer. This makes the buyer is $4,372.67 better off buying down the mortgage by paying the additional points.

For a person buying a home, it is sometimes difficult to come up with the extra amount for the points. However, an additional benefit you have is that the points paid are considered interest by IRS and can be deducted in the year paid.

How Do Discount Points Work?

A rule of thumb commonly used is that one discount point lowers the quoted mortgage rate by ¼% or 25 basis points. A lender may quote X% + .6 points for a mortgage. Using this scenario, to lower the mortgage rate by .25%, the buyer would need to pay 1.6 points. It is important to note that each lender determines the pricing of points for the loans they make.

It may be beneficial to a buyer to pay points depending on how long they plan on being in that home. Learn more about whether you should consider paying points. Use this Will Points Make a Difference calculator and download the Buyers Guide.

Why Your Home Can Be a Hedge Against Inflation

Inflation is the sustained upward movement in the overall price of goods and services while the purchasing value of money decreases. Tangible assets like your home consistently become more valuable over time. In inflationary periods, your home is a good investment and a hedge against inflation.

Money in the bank loses purchasing power due to inflation. The interest you may be earning is almost always less than inflation.

Home prices increase during inflation, but so does rent. With mortgage rates near historic lows, the interest is, generally, less than the appreciation the property is enjoying. Combined with the leverage of using borrowed funds to control an asset, your equity often grows at a faster rate than inflation.

As an Example

Let’s take a 90% mortgage at 3.5% for 30-years on a $400,000 home. If that home appreciates at 4% a year, it will have an estimated equity of $220,000 in seven years. This is due to appreciation and amortization. That is a 27.5% annual rate of return on the down payment. That is a significant hedge against a current inflation of 4%.

Put that same $40,000 in a certificate of deposit that earned 2%. After seven years, it would be worth only $45,947. If it was invested in the stock market that earned 7% annually, the $40,000 would grow to $64,231. The equity in the example for the home would be almost 3.5 times larger.

Why a Home is Better than Other Inflation Resistant Investments

Other assets considered to be good bets against inflation include some bonds, gold and other commodities and real estate. Another distinct advantage of investing in a home is that you would be able to live there with your family and enjoy it which is not possible with bonds and commodities.

There are certainly other considerations in a comparison like this such as maintenance. But this could partially offset by the cost of housing being less than you would be paying for comparable rent. And with the shortage of rental units available, the rent will continue to increase annually. However, your other housing costs are fixed (with the exceptions of increases in property taxes and insurance).

WHY CONSIDER INCREASING PAYMENTS?

Many people consider making faster or lump sum payments on their mortgage. This is a good strategy if you can afford it because it accelerates building equity. Property is often the best investment you can make [see our blog post on value of home investment here]. So accelerating building your equity so you can re-invest is wise.

PRE-PAYING PRINCIPAL

Pre-paying principal on a fixed-rate mortgage shortens the term of the loan, but the payments stay the same. This is like driving faster to get to your destination faster. So the money you pay each month is higher than what you normally would pay. But instead of ending the payments in the regular length of time, you will finish paying off the loan earlier.

RECASTING YOUR MORTGAGE

Recasting a mortgage with a lump-sum principal payment lowers monthly payment amounts for both principal and interest payments. However, the term of the loan remains the same. Recasting or re-amortization gets you to the destination at the same estimated time of arrival but by using less fuel.

WHICH IS BEST FOR YOU?

Deciding whether to pre-pay or recast your mortgage depends on a lot of factors. Your personal cash flow and investment goals will help determine which of these processes are best for you, or if it is better to continue paying your mortgage according to the original terms.

Before you shop for your new home, don’t underestimate the value of having a real estate agent or broker to help you. This short presentation below can provide topics to cover when you are selecting an agent to help you.

Remember, an agent can help you in multiple areas of the home buying process. Whether that is learning more about the area you are searching in or actually having property examined to look for any potential problems, they should help you.

On top of that, they can connect you with financial professionals and mortgage specialists. They can get estimates for work that needs to be done to the property before you take ownership. And, they can assist with any contractor searches because of their local networks.

Finally, they can negotiate in your behalf to look for better financing, pricing terms and features.

Most Valued Real Estate Agent Benefits

We Can Help

Want to learn more? Contact us by calling us at (510) 244-0085, or CLICK HERE to leave us a message. Whether you need assistance in all areas of home buying, or if you are unsure of only a single aspect of the process, we are here to help you. We can show you the real value of having a real estate agent

For the vast majority of people, a home is your best investment.

For most, a home is your best investment. If you have enough money for a down payment, and currently rent your home, consider buying a home.  Instead of investing that money elsewhere, putting it into a downpayment may be the best investment decision you can make.

Why?

That’s easy. Your home is where you live and enjoy life. But on top of that, it’s an investment that grows at a rate that outpaces inflation. This creates equity for you. And other than paying your mortgage on time and maintaining the property, you don’t have to do anything. You get “real wealth” creation, and a rate of return on you down payment that is close to 25% annually. How many of your other investments perform at that rate? Watch this short presentation for more information.

If you are in a position to invest in a home, call us right away at (510) 244-0085 or email us at info@soundnvest.com and we can work the numbers for you.

The 2022 Conventional Conforming Mortgage Loan Limits for properties with one to four units have been released. These limits are shown in the table below. Please note that the majority of counties in the San Francisco Bay Areas are considered High-Cost Areas. For a list of Bay Area Counties and their loan limits, please see our previous post, “Conforming or Jumbo Mortgage Loans.”

	Low-Cost Area	Medium-Cost Area	High-Cost Area
1 Unit	$647,200	$647,201-$970,799	$970,800
2 Units	$828,700	$828,701-$1,243,049	$1,243,050
3 Units	$1,001,650	$1,001,651-$1,502,474	$1,502,475
4 Units	$1,244,850	$1,244,851-$1,867,274	$1,867,275

Change From 2021

The Conforming Mortgage Loan Limits in California for high-cost areas have been increased approximately 18% in response to higher property values. This means new buyers can now borrow up to $148,425 more than in 2021 and still qualify for a conventional loan.

As you can see from the chart below from TheMortgageReports.com, after a lengthy plateau between 2006 and 2017, conforming loan limits have been rising faster than ever before.

What This Means To You

Both conventional and jumbo loans may be available to you. But this increase in limits gives you a better chance to be able to qualify for a conforming loan and takes into account the aggressive California housing market.

Conforming loans offer some advantages for those looking to purchase a home. Whether you are a First Time Home Buyer or a seasoned investor, conforming loans have low-interest rates at great terms. This translates to lower monthly payments.

You can put down as little as 3% and the loan process for a conforming loan is very efficient. It allows for 2-3 weeks closing periods if the buyer and seller are in a rush to close quickly. Another great aspect of conforming loans is that you might get an appraisal waiver. This helps save on costs and can speed up the closing process.

Limit Your Risk

According to LendingTree Chief Economist Tendayi Kapfidze, the most significant risk for buyers with any loan is lack of understanding. “Once you get a loan, the risk is all with the lender. [For borrowers,] the risk with conforming loans is just better understood than non-conforming loans. This was proven out during the financial crisis.”

Therefore Kapfidze encourages consumers to do their homework before filling out any loan application. “Different lenders are going to give different prices and interest rates to the same borrower,” he said. “Even within the guidelines, lenders choose which market to address. For certain high-interest areas of the market, they may price more aggressively. However, since you don’t know each lender’s strategy, talk to more than one. There may be a lender that fits better with your financial picture.”

Getting a home mortgage loan is usually the single most impactful financial decision people make in their lifetimes. So shop around and get the help of an expert before you sign on the dotted line. Contact Sound Investments by filling in the form available HERE. Our experience in mortgage brokerage can guide you to a loan that best fits your needs.

What Type of Loan Works for You?

When you purchase a home you also need to shop for a mortgage loan. Should you look at conforming or jumbo loans? Can you qualify?

Conforming Loans

The first place to start is usually to find out what conforming loan rates are in your area. The underwriting guidelines for conforming loans are consistent with regards to things like minimum down payment, private mortgage insurance, debt-to-income ratio, minimum credit score and cash reserves required.

Fannie Mae and Freddie Mac loan limits are adjusted annually to keep up with cost of living. However, with rapid appreciation experienced in many markets, it may not be enough. When a conforming loan limit is not enough, qualified buyers can turn to a jumbo loan.

Jumbo Mortgage Loans

Jumbo loans are loans are for amounts greater than the FNMA maximum limits and are considered non-conforming loans.  This allows lenders to set their own requirements on maximum loan amount, minimum required credit score, maximum debt-to-income ratio, and minimum down payment.

The rates paid on the jumbo loans may or may not be the same as conforming loan rates.  Although it might sound logical that a larger loan would have more risk and therefore, always be priced higher.  However, lenders do not sell jumbo loans to FNMA which saves them the guarantee fee normally required.   This makes the jumbo loan more profitable.  Therefore, we encourage borrowers to shop the rates. 

A minimum credit score of 700 will probably be required to qualify for a jumbo loan, together with a debt-to-income ratio below 45%.  While many borrowers seeking a jumbo may be putting 20% down, it is possible to find a lender who may only require a 10% down payment.  Lenders may be more lenient with regards to mortgage insurance.

Lenders may also require six to twelve months of cash reserves due to the increased risk of the larger loan amount.

It is also a common practice for banks to make jumbo loans available in order to attract other business that the borrower might be able to influence, such as company, corporate, or investment accounts.

How Should You Decide?

Mortgage loans are just like available properties. There are many options to choose from. How each option affects you and your present and future financial status should drive your decision. It is always best to get expert advice when shopping for a mortgage loan. So, we recommend that you work with an experienced Real Estate Agent who can put you in touch with a reputable Mortgage Broker. If you need help, contact Sound Investments. We can help you by clearly outlining your financial objectives and determine what options are available for you.

Big Upside with Shorter Term Mortgages

By opting for a shorter term mortgage, you’ll have bigger monthly payments. But the huge upside is that with a plan and some discipline, you can build equity and become mortgage free much faster.

See This Illustration

Consider a person who borrowed $300,000 at 3% for 30 years. The principal and interest payment would be $1,264.81 a month, and at the end of 12 years, the unpaid balance on the mortgage would be $210,900.

If that same person had financed the home on a 15-year term at 2.5%, the payments would have been $2,000 but the unpaid balance at the end of 12 years would only be $69,310.  The homeowner had to make higher payments, but will have significantly more equity.

Lower Interest Rates

15-year mortgages usually have a lower interest rate than 30-year loans and at the time this article was written, that difference was about 0.5%.  A 15-year loan gives the lender their money back in half the time.  If rates go up during the interim, they will be able to loan it at the higher rate sooner.  For that reason, they are usually willing to offer a slightly lower rate on the shorter term.

Total Impact

Having a lower rate means paying less interest. But another remarkable thing happens. Lower interest rate loans amortize faster than higher rate loans.

	30-year	15-year
$300,000 mortgage for 30 years	3%	2.5%
Monthly payment	$1,264.81	$2,000
Unpaid balance at end of 12 years	$210,900	$69,310
Increased equity		$141,590
Additional monthly payment		$735.56
Additional total payments for 12 years		$105,920
Savings		$35,670

This recognized wealth building technique with higher payments, saves interest and retires the mortgage sooner.  The shorter-term mortgage requires a commitment to make the higher payments each month rather than giving the borrower flexibility to spend or invest the difference each month for as long as the loan is in place.

To make you own calculations, go to the 30yr vs. 15yr Comparison.

Can you spot when you’re being phished?

Identifying phishing can be harder than you think. Phishing is an attempt to trick you into giving up your personal information by pretending to be someone you know. Can you tell what’s fake?

Try this ONLINE QUIZ from Google.com. You may be surprised how hard it is to spot an illegal phishing email message. By taking this quiz, you can learn some quick checks you can make to prevent you from clicking on a dangerous link. You don’t want to download a virus that can steal your personal or financial information.

What to do when you discover phishing?

If you have already clicked on a malicious link, you should follow these steps as outlined by MentalFloss.com:

1. TAKE A DEEP BREATH.
   Phishing schemes have become increasingly sophisticated, so don’t beat yourself up if you fall for one. Take a few deep breaths to calm down, clear your head, and plan your next steps.
2. CHANGE YOUR PASSWORDS.
   If you clicked a link that directed you to a site that appeared to be your bank, email service, or social media account, for example, log in to the real site and change your password.
3. CONTACT THE ORGANIZATION THAT WAS SPOOFED.
   Report the phishing scheme to the company—whether it’s your email provider, your utility company, or your employer—that the phisher impersonated. You can also report the details of your experience to the Anti-Phishing Working Group or the FBI’s Internet Crime Complaint Center.
4. SCAN YOUR COMPUTER FOR VIRUSES.
   Whether you downloaded an attachment or clicked on a link, it’s a good idea to scan your computer for viruses and malware.
5. WATCH OUT FOR WARNING SIGNS OF IDENTITY THEFT.
   If you’ve revealed any financial information or other sensitive data like your Social Security number, you need to watch for signs of identity theft.
6. FILE A REPORT WITH THE FTC.
   If you see signs that your identity has been stolen, report the theft to the Federal Trade Commission (FTC). The FTC will guide you through the steps to take.
7. PROTECT YOURSELF AGAINST FUTURE PHISHING SCHEMES.
   Protect yourself against future phishing schemes. Be careful when you check your inbox and pause before opening, clicking links, or downloading files from suspicious emails.

KEEPING THINGS RUNNING

Homeowners should make periodic checks to be certain things around the home operate properly and efficiently. If maintenance is required, it’s often less expensive to take care of it early rather than waiting until it is not working at all.

MAINTENANCE CHECKLISTS

Checklists are helpful because it requires little effort to know what must be done. They are usually concise and provide enough information to complete the task. These items apply to most homeowners but in no way offer a comprehensive list.

BUILDING STRUCTURE & SYSTEMS

1. Test all GFCI breakers. – GFCI breakers, as well as outlets, have a test button on them. Pressing the test button should cause the breaker to trip which shuts off all power to the entire circuit. To reset the breaker, push it completely to off and then, back to on. Learn more about GFCI circuit breakers and outlets HERE.
2. Check windows and doors for leaks … There are several ways to check for leaks. One method used on a cold day would be to hold your hand a few inches from the window or door frame to feel for drafts. Another method would be to light a candle and trace the outline of the window or door to see if the flame or smoke pull in one direction, indicating an air leak.
3. Inspect all sprinkler system stations to see if heads are leaking or need adjusting. … Manually, turn on each of the stations and look at each sprinkler that is running to see if it is leaking or if it is properly covering the area intended.
4. Check and clean fireplace(s) annually, if used … this may be a job that you want to have someone else do but you may be able to recognize indicators that the chimney needs cleaning. These things include evidence of birds or animals; fireplace smells like a campfire; smoke fills the room; difficulty starting or keeping a fire going; the fireplace walls have oily marks; the damper is black with soot and creosote. The frequency of use on wood burning fireplaces will impact the need for cleaning.

APPLIANCES

1. Vacuum dryer exhaust … not only does it affect the efficiency of your dryer itself, the accumulation of lint along with the hot air can ignite and create a fire hazard.
2. Replace HVAC filters 4 to 6 times a year … This is one DIY project that almost everyone should feel confident in handling. Locate the filter, make a note of the size, and keep replacements available. Turn off the unit, open the door or housing, remove the dirty filter, and replace it with the new one. Pay attention to the direction of the air flow; filters are marked to indicate the correct direction.
3. Vacuum refrigerator coils … Coils on refrigerators can be in different places depending on the model and manufacturer. Locate the coils and clean the dirt and dust from them using a soft bristle brush or a vacuum cleaner with a brush.
4. Replace batteries in smoke detectors … smoke detectors should be tested monthly by pushing the test button. Annually, the batteries should be replaced, even if they appear to still have life in them. After replacing the batteries, test the smoke detector to see if it is functioning properly.
5. Check garage door opener to see that safety features engage properly. Place a cardboard box in line of one of the sensors before trying to close the door. The door should reverse itself after sensing the obstruction.

NEED A RECOMMENDATION?

If you need a recommendation of a service provider for repairs, contact me at rdwilson@soundnvest.com with what you are looking for. I’ll get back to you quickly.