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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. 

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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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