Shopping for a Mortgage
Revised By: Charlie B. Holloway, CFP^®
The Henssler Financial Group Position Paper

You have found your dream house and you have chosen the type of mortgage best for you and your situation. It is now time to shop for the best mortgage.

Start by requesting Good Faith Estimates from various banks. A Good Faith Estimate is a written statement of the closing costs the lender is going to charge. It is very important that you ask for the best interest rate with zero points. It is very difficult to compare interest rates when points are charged. Once you have received several Good Faith Estimates, compare the interest rates and closing costs. You, of course, want the loan with the lowest interest rate and closing costs.

First of all, what are points? Points are fees charged by the lender. Each point charged is 1% of the loan amount, and it is due at the closing. There are two different types: origination points and discount points. Origination points cover the cost of originating the loan and are often the loan officer's compensation. Discount points are pre-paid interest used to buy down your interest rate. Both are usually income tax deductible. Points paid on the purchase or improvements on a home are deductible in the year they were paid. Points paid for refinancing are spread over the life of the loan.

Let us get back to the reason why you want zero points on the original Good Faith Estimates. For example, look at the effective borrowing rate of 7% over different lengths of time paying one, two or three points.

It is important to keep in mind that most mortgages are only held for five to seven years. Lets assume that 7% with one point was originally 7.10% with zero points. If you kept your mortgage for only 5 years, you could have paid 7.10% (zero point loan) or you could have paid 7.42% (one point loan) and here is why: If you borrow $200,000 at 7% with 2 points ($4,000), you are paying interest on $200,000, but only getting $196,000. As you can see from the above table, the more discount points you pay and the sooner you pay off your mortgage (refinance or move) the greater the effective interest rate.

Now you have compared the Good Faith Estimates and have narrowed it down to one bank. Let us look at another example: You are purchasing a home with a $200,000 mortgage at 7% with zero points and suppose the closing costs total $4,000. Now is the time to add points. Tell your lender that instead of paying $4,000 in closing costs that you instead would like to pay for two points ($4,000) and zero closing costs. It does not matter whether they are origination points, discount points or a combination of both. Some items included in closing costs are not deductible, but points are. So you may deduct the two points the year you paid them. Structuring your loan this way allows you to use points to your advantage.