With the many changes in the mortgage lending environment, many of my buyer clients are confused and don’t know what to do anymore.  I read an interesting article about new mortage lending “rules” on CNNMoney.com about this and wanted to share my opinion:

1. On buying “points” to reduce the interest rate - many lenders offer the possibility of buying a certain amount of “points” upfront (this is the same concept as prepaying some of your interest charges)  to lower their interest rate. This can be a good idea, but sometimes it is not. the time horizon you expect to remain in the home; the cost of buying points (1 point = 1% of the mortage value) ; and the amount you would save per month by buying points (principal and interest). Look at these numbers and calculate how long your break-even point is. ($$ Cost of Points/Monthly Savings = No. of Months to break even).  If your break-even period is longer than the time you expect to own this home, it is not a good idea to buy points.
2. On making a large Down Payment - 100% LTV (loan-to-value) loans are history. So you need at least 3.5% downpayment if you qualify for an FHA loan. But if you have the money, should you put down say 20%, 30% or 50% of the value? There are several factors to consider:

• Mortage Insurance (PMI/MI) - unless you put down at least 20% of the value of the home, the lender is going to want you to pay PMI. This is really a waste of money, since it only protects the lender. If you have the money to make a 20% downpayment, it is probably a good idea to do so.
• Time horizon you expect to remain in the home. The longer you expect to live there, the less you should be concerned about market corrections “wiping out” your equity. In the long run, real estate will appreciate (supply & demand - more people, same amount of land).  If you are thinking short term (i.e. less than 5 years), I would recommend making a lower down payment to prevent losing your equity in a severe market downturn.
• Your ”comfort zone” with the monthly mortgage payments. If you have a large downpayment and what you really want is a low monthly payment, making a large downpayment is probably a good idea.
• Alternative uses for your money (opportunity cost). Could you invest that money elsewhere and make it produce more for you?

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