Conference nyoss1::market_investing

	Can someone explain to me how APRs are calculated for mortgages.  I
assume that they are based on some sort of "Rule of 78s" calculation.  But,
do they include the points that are paid?  Does anyone have a formula
for converting loan interest rate, term, and points into APR?

Kevin

    Under the Truth in Lending Act (15, USC 1601), some of the charges for
    applying for a mortgage must be reflected in the APR. Thus while the
    interest rate is used to calculate the monthly payments, the APR
    includes some of the points, etc...
    
    If a bank offered a no points, no closing close, no application fee
    mortgage, then the APR = the interest rate.
    
    For a more detail discussion, see the Theory of Interest by S.
    Kellison, page 259.
    
    Gim
    
    

What are the pros and cons of refinancing a 30-yr-fixed to a 15-yr-fixed?
Are the 15 rates lower but you pay more per month?  Right now I'm about 5 years
into a 30-yr %10 mortgage.

Bob

    15 year rates are usually lower than 30-year. And yes, because of the
    shorter term, your monthly payment will be higher. I personally would
    prefer a 30-year mortgage. If I have the money, I'll pay a little more
    each month and get it paid off in less than 30 years. I just like the
    flexibility and the control for myself.
    
    Mike

   If you want to find out the difference in payments, you should run the
numbers through a mortgage program. For example:

A $100,000 mortgage at 10% 30year fixed has a monthly payment of $877.57
with total interest paid of $215,926. 

A $100,000 mortgage at %8.0 for 15 years fixed has a monthly payment of $955.67
but the total interest payed is only $72,017.  

The numbers will vary depending upon the amount of the mortgage.  I used the 
10% for the 30 year mortgage because that is what you said your current rate
is.  In general, a 15 year mortgage will be offered for 1/4% less than the 30
year mortgage, and/or will cost fewer points.  Which is better depends upon
your own situation.

Brian Hibbert

re last few:

>A $100,000 mortgage at 10% 30year fixed has a monthly payment of $877.57
>with total interest paid of $215,926. 
>
>A $100,000 mortgage at %8.0 for 15 years fixed has a monthly payment of $955.67
>but the total interest payed is only $72,017.  

but what will a 100K at 8.25% for 30 years monthly payment be if you add some 
each month to pay it off in 15 years?  the difference from case b above is 
what you pay for the privledge of having the flexibility to switch back to 30 
payment plan when your wife decides to stay home with the new baby.  :^)

i anyone cares i could punch these numbers up when i have my calculator 
handy.

-craig

	Don't mean to change the direction of the current discussion
but I have a quick decision to make and I will appreciate a simple
answer to whether or not I should refinance:

I currently have a 10% (APR 10.51), 30 year mortgage on $100,000 that I 
aquired December 1991 (I own the door knobe :^) and I plan to stay in 
the house for atleast five years.

Very soon I am supposed to close on an 8% loan and I may have to comeup
with ~$4,000 at closing. The simple question: should I refinance or send
in the $4,000 I would have paid for closing to reduce my principle?

I have discussed this off the notes file, talk to the loan officer and 
"ran" the numbers.  But I am getting conflicting results when I compare 
the arithmethic with the advice I got: loan officer says don't finance, 
other advice given says don't finance, my gutt says "finance", the 
calculation, if I have not made errors, say "finance".  

What do you think?

Thank you!

    
    	Re: .7
    
    	Yeah, tough question.  One way of looking at it is this: pretend
    that you're going to finance all the closing costs and then ask
    yourself these questions:
    
    	1) Do I like the philosophy of putting extra money into the
    principle if my loan is at X.X%?
    
    	2) Immediately after the closing is done, do I have enough excess
    cash laying around that I'd consider putting some of it towards the
    principle?
    
    	If the answer to both of these is "yes", then just paying the
    closing costs instead of financing it sounds like the right thing for
    you to do.  If the answer to either is "no", finance the closing costs.
    
    	To be picky, there is one minor difference between putting $4K extra
    towards the loan after the fact versus paying the closing costs. 
    Paying the closing costs up front means you'll still have 30 years to
    go on the mortgage, but the minimum monthly payment will be a small bit
    less since the original amount is $4K smaller.  Paying the $4K as an
    extra payment to principle after the closing date will keep your minimum
    payment the same, but knock some time off of the mortgage.  This is a
    difference, but I'd suggest not getting too worried about this fine-tuning
    level and just stick to the two questions mentioned above.  (If you
    pay the closing costs and end up with a smaller minimum amount but
    keep paying the minimum amount that you _would_ have had if you had
    financed the closing costs, you're mortgage will be shortened by almost
    the same amount, so a shorter mortgage can be had with either
    decision.)
    
    							-craig

    The other advantage of financing the closing costs is that (*MY
    OPINION*) it will be a long time before you see interest rates this low
    again.  Keep the cash for other things.  3-5 years from now when the
    Fed is trying to curb inflation rather than stimulate growth, you'll be
    happy to let your 30 year loan go full term. (*END_MY OPINION*).
    
    
    Geoff

    Does anyone have a pointer to a good "Fill in the blanks" mortgage
    payment calculation program anywhere on the EASYNET?

      <<< METOO::DISK$METOO_SYS:[NOTES$LIBRARY]SW_TOOLS_CATALOG.NOTE;1 >>>
                   -< Software Tools Clearinghouse Catalog >-
================================================================================
Note 1338.0 MORTGAGE   Allows the calculation of monthly payment of a mortgage or any 1 reply
METOO::TOOLSHED "Tool Meisterin"                     34 lines  10-SEP-1990 20:00
--------------------------------------------------------------------------------
(The information in this file is for INTERNAL USE ONLY.)         SEP-90

TOOL NAME:  MORTGAGE

FUNCTION:   Mortgage Calculator and schedule printing. 

VERSION:    Version 3.0, 9/90 
SYSTEM:     VAX/VMS V5.0 or later 
LANGUAGE:   VAX-BASIC V3.2 or later, FMS V2.2 or later 
LOCATION:   METOO""::TOOLS$DIRECTORY:[MORTGAGE]MORTGAGE.EXE  
            METOO""::TOOLS$DIRECTORY:[MORTGAGE]MORTGAGE.FLB  
            METOO""::TOOLS$DIRECTORY:[MORTGAGE]MORTGAGE.BAS  
MORE INFO:  Brief on-line help available as HELP-KEY functions (PF2) under 
            FMS. BASIC Source code has comments imbedded at head end of 
            listing. All documentation is within source code. 
SOURCE:     Mark Jay Harris @WRO1-2/D30 @FORTSC::HARRIS_MA 

GENERAL DESCRIPTION:

This tool allows the calculation of any type of installment loan. It is  
specifically intended to handle mortgage calculations as the calculations  
can include property taxes where applicable. The tool also allows quick  
comparison of variable changes, (i.e. different interest rates, principal  
or term.)  Once mortgage variables are calculated, a complete amortization 
schedule can be written to a file for printing later. 

ADVANTAGES:   No other tool known to handle this function specifically.  
              
LIMITATIONS:  None stated.  

OTHER:
See also ... 

Suggestions and enhancements are welcome.  

              <<< TALLIS::S2:[NOTES$LIBRARY]REAL_ESTATE.NOTE;1 >>>
                       -< REAL_ESTATE - put ads in #19 >-
================================================================================
Note 244.153                   MORTGAGE INFO HERE?                    153 of 153
QUIET2::HSIEH                                         7 lines  15-APR-1992 10:09
                          -< Rates are down slightly >-
--------------------------------------------------------------------------------
    COUNTRYWIDE 800 669-6659
    
    5/25 BALLOON   0 PT    8.00%
    
    7/23 BALLON    0 PT    8.25%
    
    Information obtained April 14, 1992

    5/25 Balloon:
    
    Huntington Mortgage:          7.375%   0 pt
    

                                                                      
    Has anyone here had any luck in refinancing investment properties?

I don't know if .-1 is still around, but I just went to the DCU to discuss
refinancing my home mortgage and when I asked about refinancing my investment
property, the person told me that they require 30% equity (compared to 20% for
primary residence).

...Roger...

	I am building a home in Littleton and my builder
	needs a construction loan. North Middlesex Savings
	Bank has a program where a construction loan 
	converts to a fixed rate mortgage with only one
	closing. Normally the builder has his closing costs
	for the construction loan and I would have mine for
	my mortgage. Basically I would pay $295.00 application
	and my builder would pay all other closing costs and 
	interest during construction. I can lock a fixed
	rate 45 days after construction is complete. The
	fixed rate will be what a 1 point program would
	have . Currently that is 7.125 . Instead of paying
	around $1500 in closing costs plus 1 point I only
	pay $295.00 . I think this sound good for me. Does
	anybody see any possible issues with this ? I will
	be having my lawyer review the whole thing.

Thanks ,

Brian

    I used a construction loan to build a house last year and I am not sure
    I would do it again.  The trade offs are not as clear after the process
    as they seemed to be before hand.  But in my case, the construction
    loan and mortgage were in my name.  If understand your description
    correctly, your builder would be responsible for the loan during the
    construction period and at conversion it would become your mortgage. 
    Since there is one agreement, it seems confusing (and risky) to do it
    this way.

We're thinking of buying a house and we're (my wife and I) trying to figure
out what mortgage would be best for us.  this will be our first house.  we're
both about 29 yrs old.

our goal is to get a mortage that is affordable on one salary.
we'll achieve this in part by putting down 25-35%.

ideally, as with anyone, we want the best int. rate, which will help
with our goal of getting a mort. affordable on 1 salary.

we speculate (!) that we'll be there less than 7 years, which makes the
7/23 mortage attractive.  i've seen 5/25s as well, but, i fear 5 yrs might
be too short.  7 seems longer, and, frankly, more reasonable.  in 7 yrs,
hopefully we'll be better off economically than we are today and therefore
be able to sell our first home and upgrade to something better later.
another alternative is a 15 yr fixed, but, i think it will be hard for us
to get a 1-salary affordable mortgage.  30 yr would work, no prob, but, alas,
the int. rates are the highest for these (8 1/8 w/ 2 pts).

questions:

- what do you advise?

- 7/23 -> first 7 yrs are fixed; typically, how is the int. rate calculated
  for the remaining 23 yrs?

- where to look for mortgages; who to avoid.

- when to lock:  i'm worried that the FED will boost rates once again in mid-
  to-late May, which would crank the int. rates up again.  so, i'd like to
  lock a rate in sometime between now and then.  i may have a signed P&S
  by the first week in May.  some banks say "90 day rate lock", which i read
  to mean that when you lock, the rate is good for 90 days.  say, i lock,
  and the int. rates go down 1/4 pt.  once you're in a rate lock, can one
  re-lock at a lower rate?  any advise on locking is appreciated.

thanks,
jc

    If you don't plan to bin in the home more than 7 years a 7/23 may make
    very good sense.  The rate for the remaining 23 is usually set based on
    some figure such as the Prime Rate; i.e. Prime+2% or something like
    that.
    
    Rate Locks typically require that you pay a fee to lock the rate.
    You can't normally relock at a lower rate without at least sacrificing
    your lock rate.
    
    Nobody can predict how interest rates will move.  I'd suggest that
    you lock the rate as soon as you have a P&S, so that you know what
    your payments will be and are certain the mortgage is affordable to
    you, and not worry about possible rate changes after you lock.

    When I was looking at 7/23s recently, most were using standard ARM
    type terms (eg: 7 years fixed, 1yr Adjustable after, 2% step limit, 6%
    cap)  Others were different.  Some allowed the bank to renegoiate the
    rate at the 7 year mark.
    
    It's best to ask and make sure you understand.
    
    We ended up with a Central Bank mortgage, which actually got written up
    as a 7 year fixed.
    
    	Dave.

OK, the mortgage reckoning day is approaching rapidly.  i need to know
the list questions to ask in order to do a fair comparision of mortages.
Let me see, here's what I have:

- closing costs?

- APR?

I'm going to call around on 7/23s, 6/24s (there was one advertised with a 
6.99% that looked nice... need to call to see if they are for real!).

what else?

how about lawyers?  i know i need one to make sure my P&S is copesetic.
My real estate person said the best bet is to find a lawyer that can handle
the P&S and the mortgage junk to save $$...

thanks
jc

    Things I always ask about a mortgage:
    	-  Application fee?  What does it cover?  usually appraisal and
    credit check.
    	-  Current rate structure and with how many points.
    	-  When do you lock in the rate -- at application, commitment,
    closing, anytime?  How much to lock in the rate?
    	-  How long does the process take from application to closing?
    	-  Do they sell their mortgages.
    	-  On an ARM, what are the caps [yearly and over the life of the
    loan]. These are typically something like 2/6 which means 2 points
    annual cap and 6 points over the life of the loan.
    	-  What's the margin? That's how much they add to the index to see
    what your rate will be.  I've found 2.75 to be popular.
    	-  What index do they use?  Most banks use the 1-year T-bills, but
    there are some pretty obscure indexes used.
    	-  What documentation is required to apply?  Normally, that's
    things like copies of your last 2 year's tax forms, pay-stubs, bank
    account statements for the last 3 months, P&S, etc.
    	-  Do they escrow taxes and insurance?  Can this be waived?  What's
    required to waive it?  I won't do escrows, so I only deal with banks
    that waive this requirement.
    
    That's all I can think of off the top of my head. I also ask them each
    what else I should have asked, and then I add that question to my list.
    
    Cathy

I bought a house in 1991 on a 15-year fixed.  I was rather intrigued by
the trade-off between points and rates, and I wasn't satisfied with the
loan officer's explanation of, "well, if you can pay off the points in
xx years, then,..."

So, here's how I made the comparison between points and rates.  This
works best when comparing rates at one bank because the closing costs
and fees would be consistent.  First, assume for the calculations that
any pre-paid points would come out of the down payment funds.  Then,
do a comparison of the monthly payments under each of the options.
Suppose you're buying a $125,000 house, and have $25,000 set aside for
the down-payment.  The bank says, 8%+0p, 7.5%+1.5p, or 7.0%+3p.

down payment   point costs      loan amount     rate     monthly payment
  25,000          0              100,000         8.0        ?
  23,475       1525              101,500         7.5        ?
  21,900       3100              103,000         7.0        ?
                                                                                 
Some loan amounts require PMI, so, that would have to be factored in
as the down payment amount changes.
Every loan officer and real estate agent should have the booklet that
gives the monthly payment amounts for amounts and rates.  Most programmers
have written a program to perform this calculation too.
This number is primarily for comparison purposes; actually changing the
loan amount can be done, but, since it is stated on the contract, it
requires an ammendment to change it.
I've rounded my example a bit, but, I hope you get the idea.

Good luck

-Austin

Make sure you know if escrow accounts will be required for property taxes,
PMI, etc. I hate these accounts. Suppose you pay your monthly property tax into
one of these accounts and the servicer fails to pay you town property tax -
you're still on the hook for the tax. Servicers can and do go bankrupt, and
since the loan may be sold to whomever you know nothing about the servicer.
Avoid these escrows, if possible.

Mark

    There is indeed a direct correlation between points and rates. The net
    effect is that the bank gets the same, regardless. If I recall, for
    every point you pay, your rate will be reduced by 1/4 %. If you do the
    math, and assume that any points paid will increase the amount of
    principal to be mortgaged, it turns out to be a wash. Thus, for example
    (and I have not checked this - it's from memory), a 8%, $100,000
    mortgage will have the same monthly payment as a 7.75%, $101,000.
    mortgage. You might have your own reasons for trading higher points for
    lower rates, or vice versa. But, not surprisingly, the amount to the
    bank stays pretty much the same (disregarding any NPV calculations of
    course).

>Avoid these escrows, if possible.

How?  I hate the escrow accounts as well... but how does a lender decide if
escrow accounts are needed?  

Dan

OK, points... what _exactly_ are point?  are you paying down a portion of
the interest or the mortgage straight away with points?  i see all the time
in the paper that a 2 pt loan carries a lesser int. rate than a 0 pt loan.
the question is, what should I do?  there seems to be some kinda of 'payoff'
schedule w/ pts - how many yrs does it take to make 2 pts worth it?  how
about 1 pt?

    To -1
    See -3 - there is really very little difference inthe amounts you end
    up paying. Assuming you are going to add the amounts of the points to
    the principal you borrow, it is really a wash. (Lower rate on higher
    principal approximately equals higher rate on lower principal). Best
    thing to do is get a book, or a basic program, on rates, terms, and
    monthly payments and convince yourself that it is really a wash. Now,
    there MAY be reasons that will cause you to want to keep the rate high
    and principal low, or vice versa. 

> OK, points... what _exactly_ are point?  are you paying down a portion of
> the interest or the mortgage straight away with points?

	Points are also called "pre-paid interest", which is exactly
	what it is.

	While paying points may reduce the "contract rate", it does not
	reduce (and in fact may increase) the "annual percentage rate"
	(ie. APR).

	Also note that if you pay points and you pay off the loan early
	(or refinance), your effective APR for the paid off loan is now
	higher.

	Also note that there is a very big difference between pre-paying
	interest (ie. points) than not paying points (and hence pay
	a higher contract rate), and that is that you are paying the
	points with TODAYs dollars, which are worth MORE than TOMMOROWs
	dollars (tommorows dollars are worth less due to inflation, plus
	what you could of earned with that money if invested).

	What I found interesting when I refinanced last Nov. with a
	no closing cost, no points loan was that my APR was LESS than
	the contract rate (only a small fraction less).

> How?  I hate the escrow accounts as well... but how does a lender decide if
> escrow accounts are needed?  

	Both times I went looking for a loan (purchase, and later refinance)
	the standard practice seemed to be that 1st off, you needed a min.
	of 20% down to avoid PMI, and anywhere from 20-30% EQUITY (based
	on banks appraisal) to have escrow for tax and/or insurance to
	be waived.

	Oh yea, one lender I called for refinance wanted to charge
	a fee in order to waive escrow (something like 0.25 points)!

re: .28

>    ... Assuming you are going to add the amounts of the points to
>    the principal you borrow, it is really a wash. (Lower rate on higher

That's a pretty big assumption.  Many, perhaps most people who pay points
pay them out of their own funds, not by borrowing more.  

   Gary

    To -1
    But the net effect is essentially the same. 
    
    Let's say I have $5000 in the bank and want to mortgage 100,000. I have
    determined that I can get a 7.5% mortgage with no points, or I can get
    a 7.25% mortgage with one point, or I can get 7.0 with two points. I
    can either pay the points by taking money from the bank, or if I want
    to leave the money alone, I can have a higher loan amount. Recognizing
    that by mortgaging the additional moneys, the real cost is upwards of
    two times the amount.
    
    The trade-off in points/rate is best determined by individual
    situation, and a basic program (or rate table). It is influenced by the
    term of the mortgage. But, for a starting point the following should be
    valid:
    Assume principal of 100k, mortgage rates which start at 7.5% no points
    and go down by paying points:
    
    10 year term - paying two points is the equivalent of a 1/2% rate
    reduction
    
    20 year term - paying two points is the equivalent of a 1/4 rate
    reduction
    
    30 year term - same as 20 (not really, but close enough)
    Def: Equivalent means within a few bucks per month
    
    So, individually, one must start with a principal amount, pick a term,
    look within a lending institution for the point to rate trade-off, and
    pick that which best meets your individual situation. 
    
    

re .29
>	Also note that if you pay points and you pay off the loan early
>	(or refinance), your effective APR for the paid off loan is now
>	higher.

I am not sure what you are getting at.  The mechanics of an annuity loan are 
VERY simple.  Each month, you pay interest at 1/12 of the annual rate on the 
remaining balance.  There is no particular distinction over the term APR 
vis-a-vis paying off the loan.  

When you are quoted a rate and then quoted an APR (slightly higher) that means
they are rolling in the points to the overall loan and telling you what the
effective rate would be if you incerased the principal by the amount of the
points, but kept the term and payments constant. 

As for paying off the points at closing...

If you pay off the points at closing - out of obviously seperate funds like 
writing a check - you can claim a deduction for the whole amount in that tax 
year; if you blend in the points to the loan, you deduct a percentage each
year.  The value of claiming them now vrs later has a lot to do with your tax 
bracket today as opposed to coming years, the amount of cash available to you, 
and other financial planning techniques.

    to -1
    
    As to the tax comments at the end of the note...
    
    I think that what you indicated USED TO be the rule. I believe it has
    now changed, and points, whether rolled into principal or paid
    separately and distinctly, must be deducted over the life of the
    mortgage. I think this was a rule change effective about two years ago.

re .34
 and others with "points" questions.

I refer you to the 1993 Tax Year instructions for form 1040, schedule A...Line
10 "POINTS NOT REPORTED ON FORM 1098" 

"
Generally, points charged only for the use of money are deductible over the 
life of your mortgage.

Exception.  You may deduct points (including loan origination fees on a loan 
used to buy your main home) in the year paid if:

* The loan was used to buy or improve your main home, and

  * the loan was secured by your main home and

  * It is customary to charge points in the area where the loan was made and,

  * the points paid did not exceed the points usually charged in that area and,

  * the points are computed as a % of the amount of the loan, and

  * either you provided funds at the time of closing at least equal to the 
    points charged if the loan was used to buy your main home

	or

  *  you paid the points with funds other than those obtained from the lender 
     if the loan was used to improve your main home.


==================

As I said, pay the points out of seperate funds (write a personal check) and 
claim them on Schedule A.

    To -1
    I stand corrected. I forgot that indeed the IRS, for FY93, changed the
    rules back again, to the former interpretation.
    
    mea culpa
    

There are two cases:

1.  points used to purchase a house and
2.  points used in refinancing a mortgage.

Points used to purchase a house is tax deductible in the
year of purchase.

Points used for refinancing is tax deductible over the life
of the mortgage.

You should verify by calling IRS 1-800-829-1040.

Gim

Recently there was a ruling that points paid by the seller
can be deducted by the buyer.

>>	Also note that if you pay points and you pay off the loan early
>>	(or refinance), your effective APR for the paid off loan is now
>>	higher.
> I am not sure what you are getting at.  The mechanics of an annuity loan are 
> VERY simple.  Each month, you pay interest at 1/12 of the annual rate on the 
> remaining balance.  There is no particular distinction over the term APR 
> vis-a-vis paying off the loan.  

	You answered your own question as to what I was getting at!  The
	APR, which takes into account the pre-paid interest, is computed
	on the basis that the loan will not be closed until the term of
	the loan.  If you close the loan (refinance, pre-pay, or sell)
	earlier than the term in the contract, you effectivly paid a higher
	APR than the one quoted to you.

	Example, if you borrowed $100K on a 30 term loan and pre-paid
	$2K in interest (ie. 2 points) and got a contract rate of 10%,
	and then you refinanced or sold after only one year, your APR
	would of effectivly then been roughly 12%.  But if you took the
	full 30 years to pay if off that $2K in pre-paid interest would
	be spread out over the full 30 years and your APR would then of
	been less (I don't remember the formula for computing the APR,
	anyone?).

	Am I correct, or did I fail to take something into account?

re .38

Perhaps it is one of Point Of View.....

You are correct ONLY if you consider points to be additional interest; they are
not.  Points are are a form of legal bribery.  The banks charge you up front
for the priviledge of providing you with a loan.  Points have no relationship
to any bank costs nor are they related to the length of the mortgage; they are
strictly Additional Profit. And on top of that, they are nice enough to float
you an additional loan, on top of the one you are using to buy your house, to
pay off the points.  APR is how they show the effect of the additional loan in
terms of the original loan rate. 

Now then, if you consider points to be some form of interest, then, indeed, 
your interpretation is correct since you would be considering them in terms of 
the length of the loan.  Wheras, if you consider points as a 
cost_of_getting_the_loan no matter how long the loan, then you are incorrect 
when you say paying off the loan eary has an effect on the interest rate.

Dave

> You are correct ONLY if you consider points to be additional interest;
> they are not.

	I hate to be the one to tell you this, but points ARE very much
	indeed pre-paid interest.  The IRS refers to points as pre-paid
	interest, and at least on closing sheets in NH it says "pre-paid
	interest", not "points".

> Points are are a form of legal bribery.  The banks charge you up front
> for the priviledge of providing you with a loan.

	Whose been feeding you this dribble :-)  Points are paid to
	REDUCE your contract rate (and hence lower your monthly payment).
	Alot of times points are paid to bring down the contract rate because
	the buyer(s) current income would not be enough (using the banks
	formulas) to make the payments (this is also one of the reasons
	some sellers offer to pay some of the points).  In any case it's
	only common sense that if the bank is going to give you a lower
	contract rate, the lost revenue (interest) needs to be made up
	somewhere.  Hence you pre-pay some of the interest instead of paying
	it later.  I believe the reason the pre-paid interest is commonly
	refered to as points is because it is X number of percentage POINTS
	of the principal amount of the loan.

> .... they are strictly Additional Profit.

	additional "up-front" profit, but that's a trade off for the
	LESS monthly profit (smaller monthly interest payments).

re .40

According to the IRS, not some state form, points are charged for the use of
money as opposed to a fee (interest) based upon the CONTINUING use of money
with that fee computed  against the periodically declining balance; a subtle
difference. 

Interest -including any pre-paid interest- is computed on the balance owed at
each and every period (basic annuity calculations). 

You will pay the points, in toto, no matter how long you have the loan for
since points are based on the Principal of the loan at the beginning of the
loan. 

You can roll your points into the loan and pay them off at a monthy rate.
If you pay off your note early, the bank will provide a payoff calculation that 
includes the remainder of your principal as well as the remainder of your 
points.  If it were pre-paid interest, that calculation would not include the 
points part.

From my perspective, as well as many other Financial Advisers, points are NOT
pre-paid interest.  When your banker starts his presentation as, "Well, Mr.
Borrower, the interest rate is 7.75%, but if you pay 2 points up front we can
let you have it for 7.5%", then you are talking pre-paid interest. 

(If the bank then turns around and lets you roll the points back into the loan 
to facilitate having lower closing costs, the interest rate pops back up to 
7.75% and all they have done is played a shell game with you.)

When your banker starts his presentation as, "Well, Mr. Borrower, the interest
rate is 7.5%, PLUS 2 points, and you can roll that 2 points into the loan for
an effective rate of 7.75%", that is NOT pre-paid interest; it is a service
charge without a cost-basis. The fact that you can roll it into the loan for a
higher rate supports the contention that it is a no more than a less_painful
way of paying the additional profit. 

Hope this helps...

Dave

> When your banker starts his presentation as, "Well, Mr.
> Borrower, the interest rate is 7.75%, but if you pay 2 points up front we can
> let you have it for 7.5%", then you are talking pre-paid interest. 

> When your banker starts his presentation as, "Well, Mr. Borrower, the interest
> rate is 7.5%, PLUS 2 points, and you can roll that 2 points into the loan for
> an effective rate of 7.75%", that is NOT pre-paid interest; it is a service
> charge without a cost-basis.

	It's the same bottom line either way, reguardless of how they
	word it.  Your not going to find a zero points loan at the same
	contract rate as one with points attached (if you do, they will
	be at two different institutions, one of which is raking you over
	the coals).

	As such, as my original note indicated, you are still effectively
	paying a higher APR if the loan is paid off before full term
	(even in the case of rolling the points into the loan since
	your still paying the points in full, even if you paid the loan
	off earlier because rolling the points into the loan simply
	means you are also borrowing the money to pay to the points).

> The fact that you can roll it into the loan for a
> higher rate supports the contention that it is a no more than a less_painful
> way of paying the additional profit.

	It also supports my contention that it is no more than pre-paid
	interest, for which they are also willing to let you borrow
	(and pay interest on obviously).  And the most common reason I
	know of for people to roll the points (and I believe they'll usually
	roll the other closing costs in as well in this case) into the loan
	is to be able to get the lower contract rate which allows them to
	qualify for the loan in the first place (ie. people who wouldn't
	be able to qualify for the loan at the higher contract rate because
	their income wouldn't support the monthly payments).

	I still don't understand why you like calling it "additional"
	profit.  Like I said before, they may be getting more up-front
	profit at loan origination time, but because you are getting a
	lower contract interest rate (than for a loan w/less or no points),
	their post-origination profit is less.

> According to the IRS, not some state form, points are charged for the use of
> money as opposed to a fee (interest) ....

	FWIW, here's what the IRS says in Pub. 936 (Home Mortage Interest
	Deduction) for 1993 returns on page 4 under the heading "Points":

  "The term `points' is used to describe the charges paid by a borrower to
obtain a home mortgage figured as a percentage of the amount borrowed.  They
are also called loan origination fees, maximum loan charges, or premium
charges.  If the payment of any of these charges by a borrower is ONLY for the
use of money, it is interest.
  These points are interest paid in advance and you cannot deduct the full
amount for points in the year paid.  ........"

	I believe I was wrong then when I said the standard NH settlement
	forms called it "pre-paid interest".  I meant to say "loan origination
	fee".  I believe the line item that says pre-paid interest is for
	the interest charged from the loan origination date to the end of
	the month, sorry for the confusion.

	The key point (pun :-) in IRS pub. is that it does indeed consider
	points pre-paid interest (ie. "interest paid in advance").

	What's also interesting is that late payment charges and prepayment
	penalties (I thought such penalties were now illegal?) are also
	deducted as if they were interest paid.

    My understanding of points.
    
    Most Home Mortages are not held by the bank but sold to other home
    lending agencies. The points would go directly to the Bank who wrote
    the Loan (thank you for coming to us) and then the mortage is sold
    (here's some more upfront money for selling us the mortage). All
    interest from here on in goes to the other Lending Institution.
    
    This is the way it was explained to me 15 years ago when I purchased
    my home........
    
                                        -Steve

re: .44

You're on a good path.

The bank gives you money (which gets handed directly to the
seller).  They, in turn, get a note which has a certain value,
not unlike a bond.  They turn around and sell the note, thus
making their profit.

Just as a $100,000 bond with a face interest rate of 7% is worth
less than a $100,000 bond due on the same day but with a face
interest rate of 7.25%, your mortgage note is worth less if it
carries a lower interest rate. Thus, even though the bank provided
you with the same exact amount of money either way, they will get
less money from the sale of your note if the interest rate on it
is lower.  They make up the difference by charging the points.

In theory, they could set the points to exactly balance the difference
in the note value, assuming immediate sale of the note.  In practice, 
they round, since interest rates are done in increments of 1/8, 
and points are rarely done in increments smaller than 1/4.  They're
certainly free to try to get extra profit on either method.  If 
paying two points only lowers the interest rate by 1/8, then it's fair 
to say that the points are extra profit (but they're also interest, as
far as the IRS is concerned).  If paying two points lowers the interest
rate by 5/8 or 3/4, then it's fair to say that they're making extra
profit on their no points loan.  

The entire situation is made more complicated by the intangible
risks involved, which may or may not be accounted for by the secondary
market.  A higher interest rate on the note might argue in favor
of a higher risk of refinancing (and thus a lower value for the note than
the increased interest rate would call for). 

   Gary

OK, points aside, I have another question.  what is the different between
a 7/23 mortg. and a 7-ballon mort?

One diff is 1/2 pt in the int rate!!

I'm having a hard time figuring out the diff. betw the 7/23 and the 7-ballon.
seems like for the 7/23, you're paying the 1/2 pt to roll the mort. over
at year 7 at some fixed/capped rate, where as with the 7-balloon, you're on
your own at the 7th year.

what am I missing?

also, w/ the 7/23 and the 7-ballon, the pt-payoff is about 45 mos vs. about
57 mos with the 30 yr fixed...

    
    
    I'm looking for a mortgage.com program which I could copy, 
    and plug in intrest rates and payment schedules to calculate
    payments. 
    
    thanks
    steve

     copy msbcs::disk_hurley:[hurley]mort*.*;*
    
    After you get the 4 files just run mort
    
    enjoy..
    
    Files unprotected for the day..
    
    

    If you have MS Excel, there is an example you can use.

The economy is struggling.
unemployment is low.
inflation is not a threat.
lots of pressure on the Fed in credit mkts to rachet down the fed funds rate.
so, now i'm thinking it is time to switch out of my 5 7/8 adjustable
to something else.

the program i'm in now is a 1 ARM, 6 pts cap, 1% / yr max movement.
first year was 4 7/8.  i'm now on my 2nd yr at 5 7/8.  next year
will be 6 7/8 unless the 30 yr t-bills drop another 3 pts.

i'm wondering if i should go w/ a 15 yr or 30 yr.
right now, i'm 30, married, 2 incomes, no kids.
we want to plan for a mortgage managable by 1 salary.
if i went with the 15 yr, we'd have to pay down my
outstanding loan by about 40k, representing about 35%
of my savings/investments, which i would expect to take
18-24 mos to recoup assuming 2 incomes continue.  
30 yr, no paydown needed.

the bene's i see on the 15 yr:
	- payoff house by 45 yrs old
	- save quite a bit in the long run on int payments

the bene's i see on the 30 yr:
	- more int to deduct
	- more $$ avail to invest/save

the rates from east-west are 6.5 and 7.0 for 15 and 30 yr rates, 2 pts

my question is why should i go to a 15 yr?
or, why should i go w/ a 30 yr?

thanks
jc

    You can always pay off a 30 year note in 15 years if you have the
    discipline.  It sometimes pays to have some flexibilit.
    
    Bill

    
    
    FYI:  If any of you folks are looking to refinance or looking for a 
    new loan ... Call MORTGAGE MASTERS.
    
    They have the BEST rates ... they do not advertise and process over
    1000 loans a week average.  Loan officer I am working with has been
    with them for over 6 years.
    
    Give them a call and see what they have to offer ...
    
    I just got  1 year adjustable  5 7/8 No point or closing costs.
    I called 4 other lenders and NONE could even match. They told me to
    grab it and run .... I'm running!
    
    Ask for Dave Gibbs (617-255-0099), You can mention my name Paul Balich.

    RE: .-1
    
    What are the index, margin, and caps to be used to calculate the rates
    for subsequent years ? When is the next rate adjustment ?
    
    A starter 5 7/8% is only one consideration.
    
    /P.B.
    

re                        <<< Note 17.53 by 9528::BHAT >>>

>       A starter 5 7/8% is only one consideration.
  

you can do better than this on an adjustable, i think.
i saw some for 4.99 this weekend.

i have an adjustable.
started at 4 7/8 in Aug '94.
i'm at 5 7/8 now.
next adjustment is to 6 7/8 in Oct '96 unless the 30 yr t-bond
drops to 3% (unlikely).  1% / yr cap, 6% max for life of loan.
looks like i have about 18 mos to wait until a recession hits
so i can refi when uncle al lowers the int rates... just gotta keep
an eye on inflation....i'd like to get into a no pts / no closing 30 yr
for 7% or so.  right now, they are 7 5/8 or so
    

 
>       A starter 5 7/8% is only one consideration.
xxx Thats true, but mine is a 2/6 cap (see below) .. What else where you 
    ferring to regarding other considerations ?  
    

you can do better than this on an adjustable, i think.
i saw some for 4.99 this weekend.

xxx NO POINTS or CLOSING COSTS, if so, where ???
    
i have an adjustable.
started at 4 7/8 in Aug '94.
i'm at 5 7/8 now.
next adjustment is to 6 7/8 in Oct '96 unless the 30 yr t-bond
drops to 3% (unlikely).  1% / yr cap, 6% max for life of loan.
    
XXX You sure ... I *never* seen a adjustable that was not 2%/yr_Cap, mine
    is like yours, 6 point MAX lifetime.
    
looks like i have about 18 mos to wait until a recession hits
so i can refi when uncle al lowers the int rates... just gotta keep
an eye on inflation....i'd like to get into a no pts / no closing 30 yr
for 7% or so.  right now, they are 7 5/8 or so
    

re                       <<< Note 17.55 by CSCMA::BALICH >>>
            -< Where can you get lower than 5 7/8 NO pts and CLOS >-

>xxx NO POINTS or CLOSING COSTS, if so, where ???
 
no, that was not w/ no pts no closing.
probably 2 pts.
but, these adjustable loans pay off the points much faster.
i calculated my pt payoff to be about 19 mos... and, i'm getting
close to 19 mos in the loan now.
   
>XXX You sure ... I *never* seen a adjustable that was not 2%/yr_Cap, mine
>    is like yours, 6 point MAX lifetime.
 
positive, that that is why i went with this program.
believe me, i looked very very hard... and came up with the 1/6 caps
loan, which no one else was offering at the time.  everyone else was
2/6 caps...

    

    Rates have been holding steady for the past few weeks.  Over the
    week-end the rates went up aprox 1/4 percent.  Anyone want to comment
    if they believe they'll continue to rise or will they be dropping
    back to where they were?
    
    Not sure if we should lock in at 7.87 (15 yr) or hold out till the
    end of the week to see if the rate drops back down to 7.50.
    
    Any predictions?
    Julie
    

    I thought the stock market went mildly bananas (Good economic news!
    Eek! Sell!) on Friday because it thought rates were going up.  I
    interpret this to mean they aren't likely to be cut.
                                       

> I interpret this to mean they aren't likely to be cut.

	Likely just the opposite, unless there is some bad economic news
	to offset the good news you refered to (June unemployment rate
	lowest in 6 years, with the additional kicker that the hourly
	wage went up 9 cents), the current expectation is that the Fed
	will put some breaks on (ie. raise interest rates) to keep inflation
	at bay at the Aug. meeting, if not sooner in a special meeting.

	The flip side is that the Aug. Fed meeting coincides with the
	Democratic National Convention and Greenspan may play politics
	and not raise rates at that time.  Greenspan has also been quoted
	(or rumored?) to be sympathetic to preserving the investment in
	the market, and something about NASDAQ stocks losing 50% of their
	value in single trading days .....

	Sometime between now and the scheduled Aug. Fed meeting Greenspan
	is supposed to be giving the usual update to congress, at which
	time, like always, everyone will be analyzing every word or bodily
	sound he makes ....

my bet is they will raise _before_ the Aug 20 meeting, if more
news indicating inflation and/or too much economic growth continues
to come in.  to the tune of 1/2 %

    What am I missing:
    
    If an Increase in Interest rates will check inflations rate of
    increase, will not the same increase add to the cost and price ofall
    goods and services. Cause and effect, chicken and egg, etc etc etc

    
    In USA Today, they say that the decrease in unemployment was due to the
    massive hiring at the Olympics and its related activities. If you
    subtract this hiring binge, there is not a significant decrease in
    unemployment.

The interest rates controling growth controling wage pressure
controling inflation argument is an appealing one, but not the
only one.  It seems that very many people subscribe to that theory,
but many econimists prefer another model where inflation meets
the expectations of inflation.  It does a whole lot better explaining
the late '70s where growth was very much under control (recession)
and interest rates were very high.

The story goes as follows:  Individuals make their own guess as to
what inflation will be.  They negotiate contracts to borrow and/or
lend money and/or to sell their goods and/or labor.  Those negotiations
have various time frames.  [Some contracts are variable, some fixed.]
Inflation is determined by the nominal interest rates on those contracts.

There's theoretically no problem with any inflation rate (except the
cost of repricing goods & renegotiating the occational contract)...  so
long as there are no unexpected changes.  An unexpected rise benefits
borrowers with fixed rate contracts at the expense of lenders.
Likewise with a fall in inflation lenders benefit at the expense
of borrowers.

See modern macro and micro economic texts for details.
I think Dornbush and Fischer is relavent.

> An unexpected rise benefits
> borrowers with fixed rate contracts at the expense of lenders.
> Likewise with a fall in inflation lenders benefit at the expense
                                     ^__transpose_^
> of borrowers.

	Since the topic is morgages, the latter is not quite true.  A
	fall in inflation (and hence in interest rates) results in
	lots of morgage holders re-financing.  This is the reason why
	some morgage lenders these days are offering discounted interest
	rates if you agree to pay a penalty if you re-finance before X
	number of years.

	I also believe most morgages are written such that the lender is
	able to call-in the morgage for any reason, so that in theory
	they could call in low interest fixed rate loans when rates go
	up signficantly, but in practice none do (at least not for this
	reason).

>	Since the topic is morgages, the latter is not quite true.
    
    	Actually, the topic is "mortgages".
    
    	Readers are advised there is -plenty- of discussion in the
    	TALLIS::REAL_ESTATE conference, and it may be worth ambling
    	over there to discuss the finer workings of mortgages.
    
          John

>>	Since the topic is morgages, the latter is not quite true.
>     	Actually, the topic is "mortgages".

	That "t" always gets me as I never pronounce it either :-)

>     	Readers are advised there is -plenty- of discussion in the
>     	TALLIS::REAL_ESTATE conference, and it may be worth ambling
>     	over there to discuss the finer workings of mortgages.

	Actually as moderator of the Real_Estate conference I can
	tell you that the "plenty" of discussion in that conf. is
	not current (and quite old).  And that the noter who re-vived
	this topic had even cross-posted between both conferences
	and got no bites in the Real_Estate conf.

	If John doesn't mind, I'd prefer the discussion stay here.
	Mortgages have always been a cross-over topic between the
	two conferences, but IMHO the current discussion is more
	in line with this conference.  Ie. we are talking about
	long-term interest rates.  If the discussion started getting
	into details about mortgages themselves (such as points, PMI,
	bi-montly payments, etc, then I'd stay that's closer to the
	Real_Estate conf.).

>	If John doesn't mind, I'd prefer the discussion stay here.
>	Mortgages have always been a cross-over topic between the
>	two conferences.
    
    	I don't mind that the interest-rate discussion carries on here.
    	It's a bit surprising that REAL_ESTATE isn't more widely read;
    	in the Good Old Days it was really hot.
    
    	Surely there's a lesson in there somewhere.
    
          John

    Re: .64
                                               
    Having just graduated with a Bachelors in Economics (15 years years of
    continuous enrollment for a 4 year degree - I took my time!)  - Sorry
    but I gotta toot my horn...I'M DONE!!!   I know the theories you
    mention.  Expectations play a big part in many parts of economic
    theory...problem is just about everything plays a part and the portions
    of each factor change with time!  That's why Economics is an Art and
    not a Science.
    
    
    John 

> It's a bit surprising that REAL_ESTATE isn't more widely read;
> in the Good Old Days it was really hot.
>     
> Surely there's a lesson in there somewhere.

	The lesson is that the real estate market was in a vicious upward
	spiral in the 80's until the bubble finally burst (ala boom=>bust).

	Also the company now has 1/2 the number of employees, and it seems
	like the 1/2 that are with us no longer were the most active noters
	(maybe another lesson in there somewhere too :-)

    Update to my note .57 - we locked in that day and ended up with a rate
    of 7.5% with 2 points.  Haven't been watching the rates since then.
    
    Julie