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Mortgage Financing - A Q & A
When considering mortgage financing, it is important to look at three key issues - the rate structure, the loan term, and the tradeoffs in paying points. Fixed-rate mortgage payments remain constant over the life of the loan, but they are generally higher than those for adjustable-rate mortgages. Adjustable-rate mortgage payments typically start off lower, but can increase (or decrease) after the introductory rate expires according to changes in the underlying rate to which they are pegged (e.g., prime interest rate), potentially costing you more over an extended period of time.

The length of your loan term often affects both your interest rate and the size of your payments. You may obtain a lower interest rate on a 15-year mortgage that can significantly reduce the overall interest cost on your loan over the shorter payment period. However, your 15-year loan payments will be decidedly higher, typically reducing your maximum buying power and limiting your selection of potential properties to purchase. Particularly for first-time homebuyers, it may make more sense to take out a 30-year mortgage and make additional principal payments only when you can truly afford it.

Points are another factor to consider. One point equals 1% of the total principal amount of the loan. To determine whether or not paying points is cost-effective for you, calculate how much additional interest must be paid over the life of the loan in order to pay less money up-front. Paying points up-front reduces the initial interest rate on your loan. A general, though imperfect, rule is to equate each point paid with a reduction of one-quarter percent. The tax consequences must also be considered, for while points paid on home purchase mortgages are typically fully deductible for the year in which they are paid, points on refinanced mortgages must be prorated over the life of the loan.

Copyright © 2008 -- Liberty Publishing, Inc. All rights reserved.
Gene G. Stern, CLU®, CRPC, CFP®
President
805 Executive Ctr Dr W
Suite 120
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ph: 727.369.1512
fax: 727.578.4024
toll free: 800.232.3653

Gene.Stern@LFG.com

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Lincoln Financial Advisors is a nationwide financial planning firm with over 4,000 representatives in hundreds of offices across the country. Our professionals include CERTIFIED FINANCIAL PLANNER™ practitioners, Chartered Financial Consultants, Chartered Life Underwriters, Chartered Retirement Planning CounselorsSM, Certified Public Accountants*, and other associates whose expertise encompasses the financial planning strategies that help support wealth accumulation and preservation.

Our associates work as a team to provide clients with comprehensive financial, retirement, investment, business owner and estate planning using proven strategies and state-of-the-art software. Our advisors can help clients implement financial solutions to address the unique needs uncovered during the financial planning process.

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CRN200710-2008857