 |
Ask Dr. Don
By
Don
Taylor,
Ph.D.,
CFA
•
Bankrate.com |
Using the builder's mortgage
company
Dear Dr. Don,
My builder offered me a $10,000 reduction in the price of my new
home if I use his mortgage company. My house costs $515,000 without
the incentive. I am looking to get a loan for $400,000. The builder's
mortgage company is giving me a rate of 7.25 percent with no points
on a 30-year fixed-rate mortgage while my bank is offering me 6.875
percent with no points on the same amount for a 30-year fixed-rate
loan. Neither loan has a prepayment penalty. I am sure that I won't
move out of this house for at least the next six to seven years.
Since I also want to keep my monthly payments low, which offer do
you think is more beneficial?
Thanks,
Indar Interest
Dear Indar,
There's a lot more to a mortgage than just interest
rates and points. Comparing the closing costs of the two mortgages
will help you see if there are any major differences between the
two financing alternatives.
Over the life of the loan, going with the bank's
mortgage has the advantage. The table
below lays out the situation without taking into account closing
costs:
|
Builder's mortgage vs. bank's
mortgage
|
|
|
Builder's mortgage company
|
Bank mortgage
|
|
Purchase price
|
$505,000
|
$515,000
|
|
Down payment
|
$115,000
|
$115,000
|
|
Loan amount
|
$390,000
|
$400,000
|
|
Interest rate
|
7.250%
|
6.875%
|
|
Monthly payment
|
$ 2,660.49
|
$2,627.72
|
|
Total payments
|
$957,776
|
$945,979
|
|
Advantage to bank mortgage
|
|
$11,797
|
|
|
|
Making additional principal
payments
|
|
Additional monthly payment
|
|
$32.77
|
|
Loan payoff date
|
Oct. 28, 2031
|
Aug. 28, 2030
|
|
Total payments
|
$957,775
|
$920,660
|
|
Advantage to bank mortgage
|
|
$(37,116)
|
If you can use the mortgage interest expense deduction
on your income taxes, the decision will be closer than what is represented
here. Assuming a federal income tax rate of 36 percent changes the
bank mortgage advantage to about $4,000 and $20,000 respectively.
Use the worksheet in the FTC guide, Looking
for the Best Mortgage, to help you compare the two loans. Don't
forget that you can shop
for jumbo mortgage loans on Bankrate.
-- Posted: Nov. 9, 2001
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