How To Calculate The Best Mortgage Deal

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Foreclosures are soaring and millions of ordinary people are struggling to pay their mortgages; subprime mortgages accounted for almost 1.3 million home foreclosures in 2007, up 79% from 2006.

One way to avoid joining that statistic is to understand the mortgage "point" system when you shop for quotes. The system sounds confusing at first, but is relatively simple. One mortgage point equals 1% of the overall loan, meaning a single point on a $100,000 loan equals a payment of $1,000.

Therefore, one way to get a lower rate on a fixed-rate mortgage, is through paying "points' upfront. However, buying points and thereby reducing your mortgage's interest rates does not follow a 1:1 ratio. As a rule of thumb, each point paid will reduce your mortgage interest rate by .25%. That’s just an estimate though, as it depends on the lender and the markets - which is why it’s important not commit to a lender before knowing its final rate for points and reductions.

Everyday homebuyers typically can’t negotiate a break on points, but they can estimate whether the points are worth paying, often by requesting and comparing multiple mortgage quotes. “To pay or not to pay the points boils down to a simple calculation that’s determined by how long the person plans to be in the house,” says Charles Failla, a Certified Financial Planner and Principal with Sovereign Financial.

The longer you plan on paying your mortgage, the greater the benefit of having a lower interest rate. "If you’re only in the house for five years, it won’t offset the points you paid," says Failla. "But if you’ll be in for 15 or 20 years, and can afford to pay the points up front, most definitely do it."

So what does that mean in terms of dollars and cents? For answers, start with online calculators like the one on BankingMyWay.com, which shows that an apparently small point purchase upfront can reap major savings over time. For example: A single point on a $500,000, 30-year fixed mortgage at 6% will save a total of $16,931 over 10 years, $27,500 dollars over 15 years, and $36,960 over 20 years.

“The most important thing is to sit down with a real estate professional who can counsel you on which loans best suit you based on income, tenure in house and future income expectations,” says Walter Molony, Senior Public Affairs Associate with the National Association of Realtors.

Feel free to shop online for price comparisons. “But if you’re doing it on your own, you need to check them out with the Better Business Bureau,” Molony says. And if your real estate agent gets a referral fee for sending you to a lender, it must be disclosed by law. (Don't be afraid to ask your agent for multiple quotes, either!)

Of course there is another way to use points to save on your mortgage, and that is by making the right friends in high places, like Countrywide Financial (CFC) CEO, Angelo Mozilo. That is because it was recently reported that Mozilo doled out hundreds of thousands of dollars in savings on closing costs, lender’s fees and mortgage points to members of his inner circle.

That circle includes such notables as Democratic Senators Chris Dodd (Conn.) and Kent Conrad, (N.D.) and two former CEOs of Fannie Mae (FNM) -- not exactly people who are likely to be struggling with their debt burdens. In one example, Sen. Conrad admitted he had a point knocked off a $1.2 million mortgage he received in 2002 for a Delaware vacation home. (Sen. Dodd recently announced the controversy will not impede his ability to lead Congress through the continued subprime mortgage mess.)

“We find it reprehensible that Senators and Congressmen can sit on banking committees and are supposed to give oversight to mortgage bankers and homebuilders, but then take campaign donations and have these special arrangements with them,” says Thomas Martin, president of America’s Watchdog, a consumer advocacy organization. “There’s no transparency in the U.S. mortgage markets for consumers, and kickbacks are a huge deal.”

But while Countrywide’s preferential treatment of the 'Friends of Angelo' looks pretty unfair, it’s not illegal. “It would be an issue if country wide was offering this program to only wealthy Caucasians,” says San Francisco based real estate attorney Daniel Kramer. “Or if Countrywide didn’t want to lend money to a certain neighborhood.”

Still, if you aren’t a U.S. Senator, you may have a tougher time getting in contact with Angelo Mozilo at all, much less receiving a discount from him. In which case, that BankingMyWay calculator should be a link you remember. Happy house hunting!

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