Tag Archive for: smart with debt

Homebuyer Alert: Should You Pay Points or Not?

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When you’re shopping for a mortgage, you may hear about “points.” So, what are they, and should you pay points or not? Let’s break it down with a real-life example to help you decide if paying points will save you money in the long run.

What Are Points?

A point equals 1% of your loan amount. If you’re borrowing $300,000, one point costs $3,000. Points are a way for you to pay upfront to get a lower interest rate. The big question is whether paying these points is worth it for your financial situation.

How Lenders Make Money

Some lenders say, “no points” but guess what? They still make money by increasing your interest rate. For example, instead of a 6% interest rate, you might get 6.5% or even 6.75%. They make money on that higher interest rate rather than charging you points upfront.

A Real Example: $300,000 Loan

Let’s look at an actual scenario to see if paying points makes sense. In this case, someone is choosing between:

  • Option 1: 5.75% interest rate by paying over one point.
  • Option 2: 6.5% interest rate with no points.

For a $300,000 loan over 30 years, here’s how it breaks down.

  • At 6.5% interest, the monthly payment is $1,896.
  • At 5.75% interest, with over one point paid, the monthly payment is $1,774.

That’s a difference of $122 per month. Now, here’s where it gets interesting.

Breaking Even

You might wonder how long it takes to make back the money you paid in points. In this case, paying points upfront costs about $4,000. If you divide that by the $122 monthly savings, it takes a little over three years to break even. If you don’t plan to stay in the home for three years, it may seem like paying points isn’t worth it.

The Big Picture: Paying Off Faster

Now, here’s the magic trick. Let’s say you’re comfortable with the higher payment of $1,896. Instead of pocketing the $122 savings from the lower payment, what if you paid that extra $122 toward your loan every month?

Doing this helps you pay off your mortgage about 4.5 years sooner. Over time, that saves you a whopping $102,000 in interest!

What’s the Right Move for You?

The decision to pay points depends on your plans. If you’re only staying in your home for a couple of years, it may not be worth it to pay points. But if you’re planning to stay longer, you could save thousands by paying points and reducing your interest rate.

  • If you stay 2 years, the savings with a lower rate is about $200.
  • At 5 years, the savings jumps to $7,300.
  • After 10 years, you’re looking at saving $21,000.

Key Takeaway

When shopping for a mortgage, always ask your lender what the rate would be with and without points. Then, plug those numbers into a simple online tool like calculator.net to see whether or not you should pay points or not. This small step can save you big money over the life of your loan!

If you have any questions, feel free to leave a comment. We’re here to help you make smart choices with your money. And remember, don’t let debt control you; use it to your advantage. By paying attention to the details, you can save thousands and get out of debt faster!

 

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Compound interest

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How to Find the BEST Rate on a HELOC

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How to Find the BEST Rate on a HELOC

When you’re looking to find the best rate on a HELOC (Home Equity Line of Credit), it’s important to know that not all rates are the same. Rates can vary widely depending on where you shop, whether it’s a bank, a credit union, or a mortgage broker. So, how do you make sure you’re getting the best deal? It all comes down to understanding one key factor: the margin.

What Makes Up a HELOC Rate?

To find the best rate, you need to understand how HELOC rates are calculated. A HELOC rate is made up of two parts:

  1. The Index: This is a base rate that all lenders use, which is the prime rate from The Wall Street Journal. The index is the same no matter where you go.
  2. The Margin: This is what the lender adds an additional percentage on top of the index. The margin is essentially the lender’s profit, and it can vary greatly between different institutions.

For example, I recently helped a client, Steve, who was shopping for a $100,000 HELOC. One lender, a credit union, offered him a rate with an 8.5% interest. However, a mortgage broker offered a rate of 12.5% for the same loan. That difference in the margin would have cost Steve an extra $4,000 in interest each year. It is important to keep this in mind when looking for a HELOC so you don’t pay more than you have to! 

Focus on the Margin

Since the index is the same across all lenders, your main focus should be on finding the lowest margin. Think of it like shopping for gas. You might drive down the street and see three gas stations. However, each one is charging a different price for gas, even though they all get their supply from the same refinery. The difference between them is in the profit each station wants to make. 

Similarly, different lenders charge different margins based on how much profit they want to earn. For example, one credit union the area offers a 0% margin, meaning they’re not adding any extra profit to the index. On the other hand, some banks and mortgage brokers might add margins of 2%, 3%, or even 6%. That’s why it’s crucial to shop around and compare.

How to Shop for the Best Margin

When you’re ready to shop for a HELOC, start by comparing margins. Call or visit 10 to 15 different credit unions, banks, and mortgage brokers. Ask them about their margins. Once you’ve found a few with the lowest margins, then you can look at other factors like fees or terms.

For example, in Steve’s case, taking the time to find the best margin could have saved him between $4,000 and $5,000 in interest over the life of the loan. That’s money that could go towards other bills, paying down debt, or just enjoying life a little more.

Start Shopping Smart

To get the best HELOC rate, start with the margin. Focus on finding the lowest one, then compare other costs. By shopping smart, you can save a significant amount of money and put it towards the things that matter most in your life.

If you need help getting started, download our free HELOC Shopping Scorecard below or check out our website for more info. And remember, every dollar saved on interest is a dollar you can invest back into your life.

Watch our most recent video to find out more about How to Find the BEST Rate on a HELOC

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Cash-Out Refinance: Avoid the $250,000 Blunder Most People Make

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Are you thinking about a cash-out refinance? While it might seem like a great idea to free up some cash each month, it creates further financial strain in the future. Therefore, before you jump in, let’s look at the numbers in order to see how this decision could cost you a whopping $250,000 over time. Let’s begin by looking at the average debt provided by Dave Ramsey. 

What is a Cash-Out Refinance?

To clarify, a cash-out refinance allows you to take out a new mortgage for more than you currently owe, as well as pocket the difference. It’s tempting if you’re looking for some extra cash or want to consolidate debt. However, in today’s market, with interest rates climbing, you might be setting yourself up for a costly surprise.

Cash-Out Refinance
New Loan Interest Rate Monthly Payment New Total (Current Payment $2,669 – Cash-Out Refinance $1,962)
New Mortgage Balance $295,000 7% $1,962 $707 (Monthly Relief)

Cost of Cash-Out Refinance
Monthly Payment Remaining Number of Payments Cost Over Loan Life Additional Money Out of Your Pocket!

 (Refinance Cost $706,550 – Total Cost Previously $454,591 
$1,962 360 $706,550 $251,959

What is a Home Equity Loan?

A Home Equity Loan, on the other hand, is a type of loan where you borrow against the equity you’ve built up in your home. To put it another way, it’s a second mortgage with a fixed interest rate, a set repayment term, as well as consistent monthly payments. Unlike a HELOC, which acts like a credit line, a Home Equity Loan gives you a lump sum upfront that you repay over time. Therefore, it is a stable option for consolidating debt or financing big expenses.

Home Equity Loan
New Loan Interest Rate Home Equity Loan Payment  + Mortgage New Total (Current Payments $2,669 – Mortgage with HEL $1,959)

(Credit cards and auto loan paid off)
Home Equity Loan  $57,500 9% $793 + $1,166 = $1,959 $710 (Monthly Relief)

Cost of Home Equity Loan
Monthly Payment Remaining Number of Payments Cost Over Loan Life + Mortgage Additional Money Out of Your Pocket!

(Home Equity Loan Cost  $461,249 – Total Cost Previously $454,591 
$793 105 $83,287 + $377,962 =

$461,249

 $6,658

Monthly Payment Relief: What Does It Really Cost?

Sure, both options give you that monthly payment relief you’re looking for, however, only one of them doesn’t mortgage your future. Therefore, by choosing the home equity loan over the cash-out refinance, you will not only save big now, but in the long run as well. 

Out of Pocket Difference Between the Two Options 
Cash Out Refinance $706,550 $245,301
Home Equity Loan $461,249

Bonus: Short-Term Impact

Some people say they won’t keep their mortgage for 30 years. However, the financial impact of a cash-out refinance can be seen after just one year! 

BONUS: Cash Out Refinance: Cost By Year 
Year Cost 
First Year $12,975
Third Year $26,987
Fifth Year $42,894
Tenth Year $80,679 + $11,898 = $92,577

Your Best Option in Today’s Market

In today’s market, a home equity loan is often the better choice. It not only provides the monthly relief you need, but it also doesn’t cost you a fortune in the long run. Remember, it’s not just about getting by today, it’s about protecting your future, too. 

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Do You Know How to Calculate Your HELOC Payment?

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Do You Know How to Calculate Your HELOC Payment?

Thinking about adding a Home Equity Line of Credit (HELOC) to your financial toolkit but unsure about the payments? You’re not alone. Many people want to know what to expect before they sign on the dotted line. In this guide, we’ll break down a simple way to calculate your HELOC payment using real examples. Let’s get started!

Understanding HELOC

What is a HELOC? A Home Equity Line of Credit (HELOC) is like a mortgage on your house, however, it works more like a credit card. You get a starting balance that you can borrow against, and during the draw period, you can borrow and pay back as much as you like. To clarify, this draw period usually lasts 5 to 10 years.

Example Scenario

Let’s look at an example to see how it works.

Someone wants to move $20,000 of debt to their HELOC because they have credit cards with higher interest rates. They want to know what their payments will be after the first month.

Step-by-Step Calculation of your HELOC Payment

  1. HELOC amount: $20,000
  2. Interest Rate: Most HELOCs start at Prime. For this example, let’s use an 8.5% interest rate.

Calculating the Interest

  • Yearly Interest:
    • $20,000 × 8.5% = $1,700 per year.
  • Monthly Interest:
    • $1,700 ÷ 12 = $141.67 per month.

So, the rough monthly payment is about $140. Remember, this is just an estimate. The actual amount can vary slightly each month since interest on a HELOC is calculated daily.

Comparing HELOC Payments to Credit Card Payments

In this case, the person was paying about $600 a month in credit card payments. Of that, $400 was just the interest. By moving everything to a HELOC, they now pay around $140 in interest. This change saves them about $260 per month.

Conclusion

Calculating your HELOC payment can help you understand your financial options better. If you have questions or need more examples, feel free to ask in the comments. We’re here to help!

Download the HELOC Payment Calculator here! 

For more tips and tools, check out our other videos and resources. And remember, the goal is to use debt wisely so it doesn’t use you.

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