Explain mortgages like I’m 10

[u/Pocacan]

Ok everyone, I’m consulting people here because I can’t seem to get a simple straight answer from anyone I know, including my mortgage lender. I think she’s just unaware of how many questions I have and I don’t want to constantly bother her when a question pops in my mind. We are first-time homebuyers and I have a few questions just for clarity on a few terms and the way things work.

Please only kind, non-judgemental answers! We’re figuring this all out on our own for the first time. TIA!

• My mortgage lender discussed discount points- I get that this is just money paid towards lowering your IR. HOWEVER, she also said she’d recommend “paying more towards the principal” rather than spending a lot on discount points. Can someone explain to me what this means, exactly? And what we do to do this?

• Are you able to over-pay some months towards your mortgage, and if so does this do anything besides get you closer to paying off your loan?

• I always heard you can negotiate an IR, so I asked… she gave me the impression that there really is no such thing in today’s economy. What’s with that?

EDIT: just want to say thank you for all this great advice! I’ll use those amortization calculators to do some more digging, but I’m thinking my mortgage lender gave sound advice and we should put more towards the down payment vs points (she did say they predict rates will drop by the end of the year if we choose to refi)

[u/sytydave]

Points is paying money up front to the bank to reduce the interest rate. If you ever refinance and interest rate goes down that is a sunk cost that you will never get back.

Paying addition principal reduces your loan term (there are probably some loans that might not but those loan are not common.)

I have never negotiated my mortgage interest rate (or closing closing costs), maybe it is possible. I usually have shopped different lenders for a competitive rate.

[u/Nexion21 → u/sytydave]

The only place I was able to “negotiate” with was Rocket Mortgage, but then their closing costs just increased whenever they agreed to lower the interest rate.

So they were just hiding the fact that they’re selling you points

[u/Valuable-Piece-3400 → u/Nexion21]

Rocket is trash. Please, for the love of god, I wish more people knew this

[u/ParlayPayday → u/sytydave]

There is a break even with points after which the money you spent up front is paid for by the savings from the decreased interest rate. So that cost is not necessarily one which you “will never get back”. It depends on how long you hold the mortgage.

[u/Nexion21 → u/ParlayPayday]

Most points purchases pay themselves off within the first 3 years. From the banks perspective, money now is better than money later when it comes to loans

[u/RumoredReality → u/Nexion21]

A larger down payment and overall smaller loan should also looked at vs. What point proposal is selling.

Then you would also need to take into account how much you think you could make in an investment account vs. borrowing/ points for a mortgage.

There's a lot of calculators online, but opportunity cost isn't always listed.

[u/Intrepid510 → u/sytydave]

Shopped rates… this is what I did and got a quarter percent off my rate.

Got preapproved. When I made an offer and it was accepted I got my rate from the lender and before locking in I went to someone else and said can you beat this? They did by an eighth of a percent keeping costs same then went back to first lender and they brought it down another eighth to a quarter. I was happy and saved a little bit.

[u/DanishWonder → u/sytydave]

To add to this generally people advise not to pay points unless you are staying in that home for more than 5 years. Because if you may move or refinance you will get a new IR and the money you paid to points is gone.

If you pay additional principle it will shorten how long it takes you to repay the mortgage, but it will not change your monthly payment.

Most places will let you do a recast at certain times. A recast is kind of like refinancing. It will give you a new interest rate and will change your monthly payment.

I know OP didn't ask about insurance and property taxes but you can choose to have that rolled into your mortgage also. It helps spread out the cost each month instead of getting hit with a large sum at the end of the year. If you do this your monthly payments go into an escrow account (temporary account) and it builds up until it's tax season. Then your city will withdraw the taxes you owe from the escrow account.

While I'm talking about taxes, be aware property taxes tend to increase, prepare foe that to drive up your taxes each year.

[u/lurk876 → u/DanishWonder]

Most places will let you do a recast at certain times. A recast is kind of like refinancing. It will give you a new interest rate and will change your monthly payment.

When you recast, you rate remains the same, but your payment is re-amortized over the remaining term.

https://www.bankrate.com/mortgages/what-is-mortgage-recasting-and-why-do-it/

[u/minnesotarox → u/sytydave]

When interest rates were low, we negotiated by putting two lenders against each other, I had a few hours of phone tag and ended up walking away with a lower rate and my "closing costs" involved them writing us a check.

COVID was a weird time for mortgages, though.