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On money


© St. Petersburg Times, published June 3, 2001

Consider "points,' all charges when mortgage shopping

Consider "points,' all charges when mortgage shopping

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Q. Why do some companies charge "points" on a mortgage? It is very confusing trying to compare mortgage rates.

A. "Points" are a term for upfront finance charges that are based on a percentage of the loan amount. When they are presented as an option, the lender is giving you a choice: "You can pay me now or you can pay me later." Paying more in finance charges upfront will buy you a lower interest rate over the life of the mortgage. Paying less will raise your interest rate.

One of the better illustrations of this relationship can be found on First Union's Web site (http://mortgagedirect.firstunion.com). Click on "current interest rates" and use the online calculator to get a rate chart relevant to your situation.

First Union and other lenders hope they will make more money by giving customers options. Broker-sold mutual funds do something similar when they offer a choice of paying a commission as an upfront charge when they buy, a redemption fee when they sell or an annual marketing fee every year that they own the fund.

When comparing mortgages, it is important to look at all the charges, not just those labeled "points." Get a good faith estimate of the closing costs and add everything into your calculations.

Whether you are refinancing or buying a new home, the key questions to ask are how much the upfront costs will be and how long it will take to recoup those costs through your savings. Online calculators such as those at BankRate.com (http://www.bankrate.com) can help you analyze the situation. Then ask yourself whether you are likely to live in the house long enough to make the transaction worthwhile.

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Q. We have three pieces of rental property with mortgages that total $100,000 at 7.62 percent. With Alan Greenspan lowering rates, do you think we could negotiate a new loan down to about 6.2 percent? How much could we save on our monthly payments?

A. Dream on. Mortgage rates have not fallen that far. It is not likely that refinancing would be worthwhile for you once closing costs are taken into consideration.

Of course, the only way to know for sure what rate you could get and what it would cost you is to ask. Lenders look not only at current interest rates but at the term of the loan, your credit history, your equity in the properties and your use of the properties. Interest rates typically are higher for a mortgage on a rental property that they are for a house used as the owner's primary residence.

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Q. We are thinking of giving our son a $10,000 gift that he would use as the down payment on a house. We then would give him another $10,000 each year to make mortgage payments. Our plan would be to rent this house from him for three or four months in the summer. Are there any tax reasons why this arrangement would not work? We are in our 70s and in good health but do not want property up North in our name. What do you think?

A. It would be simpler to arrange this as a gift and forget about paying and collecting rent unless your son would be able to rent this property to others when you are not there. If he is interested in becoming a landlord, he should get acquainted with all the tax rules regarding rental income and expenses.

It sounds to me as if this is just a way for you to make a gift to him and have a place to live when you are up North. You don't have to turn this into a rental property to do that.

As a gift, the property simply would be considered his second home and your rent-free use would be classified as part of his personal use. If you are married, you and your spouse together could give your son up to $20,000 each year with no gift or income tax consequences. If your son is married, you could double that by making gifts to him and his wife.

Online money map

Want historical information on which investments performed the best each year for the past 20 years? Check out the Callan Periodic Table of Investment Returns at Callan Associates (http://www.callan.com). Click on "Resource Center."

- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731, or to huntley@sptimes.com by e-mail.

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