What's best? Discount pricing, Premium Pricing, or Par pricing?
Sounds boring already, doesn't it?
But I'm going to KISS (keep it simple silly) and then I'll TELL you why at the end.
First, you need to understand there are 3 basic interest rate pricing structures:
Discount Pricing, where you prepay the interest of a loan upfront at closing (discount points). You have thus lowered your interest rate for the life of the loan.
Premium Pricing would be a rate higher than the market requires, allowing the estimated additional monthly interest to be a credit to the borrower at closing. Typically applied to offset mortgage closing costs.
Par Pricing is the exact interest rate set by the market - no discount paid, no premium credited back.
Summary: If you want to lower your closing costs, you can choose a higher interest rate.
If you want to lower your monthly payment, you can pay higher settlement charges.
You want KISS? Skip to the end! If you can handle more, look at this example:
The first option shown is the "par" rate. Take a look at the monthly payment, and the estimated settlement charges.
The middle example is a good option for the borrower who wants lower settlement charges, which is accomplished by increasing the interest rate, and therefore the monthly payment.
And the third example is a good option for the borrower who wants a lower monthly payment. This is accomplished by prepaying interest, called discounting the rate, resulting in paying discount points.
Notice the chart makes it easier for the buyer to identify which option is more appealing to them.
BUT here's where we can crunch it down to determine if the option is BEST for them:
The first option has the borrower bringing almost $2,000 more money to the closing table, to save $76.71 per month. So if you take the extra cost ($2000) and divide it by the savings ($76.71), you get the breakeven or approximately 26 months. That means, if the borrower is going to live in the house more than 26 months, it would be worth the extra $2,000 at closing to get the monthly savings by paying for the lower interest rate.
This should help take the smoke and mirrors out of picking what rate is right for you.
NOW I'm ready to TELL you why I'm sharing this with you...
This chart is on the third page of the new Good Faith Estimate of Closing Costs!
It's not REQUIRED to be filled out, but if you want to best explore your options ask your lender to do so.
Views and opinions expressed on this site are not necessarily those of WR Starkey Mortgage.
Ruth Vogt, Branch Manager
Colorado LMB #LMB100023827
Ruth - I had no idea this was on the new GFE. As a Realtor it's good to know these things. So you can help your clients understand their options and so you can understand what they are going through to get a loan. Thanks.
We have gotten so wrapped up in what the new GFE doesn't have, that we're not focusing on what's GOOD about it!
Hi Ruth, I love how you make mortgages and rates so simple. No fluff. No smoke and mirrors. Just the facts Ma'am! Thank you for posting this :)
Hi Ruth, As a consumer, that's information that I wouldn't have known. You can bet I will remember it, though! Thank you so much for the helpful advice.
Ruth - Great explanation!
O do kiss and telll..love the title !!! Thanks for your saints comment...have fun in the south !!!
Gary D for Denver......Louie was a great intertainer
Hi Ruth, I liked this part of the new GFE, and I didn't realize it was not a required item - 'good to know. I'm glad you kissed and told :-)
Great job breaking down the GFE so that even non mortgage folks can understand it.
Well done Ruth!
Ruth, great blog. I didn't know this was part of the new GFE, but am glad it is. It should make it easier for our clients to make the correct choice in how they finance their home.
Great information Ruth! I have been through a few of these classes and every little bit that can get into my head by reading more and more is a good thing! Thank you for helping me get a little more into my head!
Ruth, Thanks for the KISS explaination and for allowing us to re-blog. This will certainly be of interest to buyers.
Nancy
Ruth~ I loved the title and the explanation. Thanks for the KISS
Jackie, "just the facts, maam!"
Carole, It's great to have read about you ... then have you stop by! thanks!
Nevin, I'm sorry I missed our call today. :(
Gary D... glad you noticed my saints comment!
Mary, some of us are just like that! ha-ha!
Craig, Glad you found the breakdown helpful!
Gary, I really think it's the best part about the new GFE.
Renee - weren't you in class today at 2:51?
Nancy, thank yoU for the reblog!
Dawn, It was between kiss and tell and pay now or pay later! ha!
Ruth - Great title and graphic for down-to-earth financial info. I wouldn not have read it except for the title, so now I know something about the new GFE that I wouldn't have learned had you not been so clever!
Ruth,
More options..... I will take door number 2..;-)
Ann Hayden in Wildwood, MO
Gail, thanks for the compliment! (BTW, still trying to get a still shot from that video and update my profile pic!)
Ann, I think that's probably how buyer's choose too!
I need all the mortgage education I can get, so thank you for this. No time today but got the gist. I have bookmarked it and will get myself smart.
And of course, Jane, you could always call me, even though I don't do loans in your area! My phone still works there! hee-hee!
A great place to show a borrower their options, even when they are not receptive to hearing about options. I love your comment about focusing on what the new GFE is today and focusing on it, rather than what it used to do. The old GFE is in the past, we are originating in the present. Use the tools we have today and stop harping on not having tools we once had. Very helpful.
Jon, thanks so much for stopping by! We think alike, huh?