I would say that anything lower than the prevailing prime rate is cheaper than dirt. The real question is, how much cheaper can you go? The Fed keeps nudging the discount rate, which has a direct bearing on the prime and other rates upon which we loan our money. It's a bit of a moving target. Today the prime rate is 5.75%. If you can beat prime, you're a winner. Here are two tactics to win a loan on your house that's dirt cheap.
1. Option Arm
How does a mortgage rate of 1% sound? There are loans out there with 1% rate for one whole year. Honest. To be sure, the rate is below the cost of the money that the lender pays and that difference is tacked onto the principle. But for that first year, you will be paying a light-as-a-feather 1% (Note that it will amortize so don't calculate your payment based upon interest only).
It works this way: each month when you receive your mortgage bill our coupon, you will have the choice (hence the use of the term "option") of paying at a rate that is 30 year fixed, or paying as an ARM fully amortizing, or paying as an ARM that is interest only, or paying a teaser start up rate of 1% (note that as the Fed continues to nudge, this start-up rate could inch up slightly).After the first year, the loan has only three choices for the next four years. The lenders who offer this product have some subtle differences but these are the basics. The real advantages here are when you can forecast that money will be tight for that first year. This gives you breathing room. It also makes your life easier when it comes to amortizing the loan. Some months are easier than others. The downside is not really a downside if you are aware of it up front -- when you pay the 1% teaser rate, the difference between that rate and the true cost of the loan is added to the principle. But maybe that's just fine.
2. Buy Down
If you can pay for points, one of the best ways to win a loan that's dirt cheap is to buy the rate. You do this by actually paying the lender up front for the difference in rate that would stretch out for the rest of the loan. You can calculate the blessing here by first asking for a no-point loan on the terms you prefer. Then you go to the absolute bottom of the rate card held by the lender and request to see the points required to "buy" that rate. Divide the number of dollars in the points by the difference in rate in dollars and you have the break even point. It's usually about a third to a half of the way through the fixed period on the loan and it is a bargain.
And you thought this was some sort of trick! Both approaches should deliver loans that are below prime rate, probably interest only. It's really Simple Finance 101, and you should know all about these two strategies right away If either of these dirt-cheap loan offerings is puzzling, contact info@cmmtrust.com.
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