Kentucky FHA Mortgage Rates | Buying down your mortgage rate, and “2-1 buy-down.”

Kentucky FHA Mortgage--Pay points to buy down rate : What t is the difference

Gina Pogol
October 19th, 2010

If you spend much time reading about Kentucky FHA mortgages, you come across two terms: “Buying down” your mortgage rate, and “2-1 buy-down.” They sound similar, but they are completely different concepts.
Buying down your mortgage rate
This simply means getting a lower interest rate by paying higher fees. For example, you might be able to get a 30-year mortgage with a 5% interest rate at no cost — no loan fees, no appraisal fees, no nothing. Or you might be offered 4.5% with standard fees. But what if you want 3.5%? You’d have to pay extra — that extra cost is in the form of what are called “discount points.” Each point is one percent of the loan amount, and gets you a discount on your mortgage rate. It might cost you several extra discount points to lower your mortgage rate by a full percent.
Should you pay extra to lower your mortgage interest rate?
It depends on how much it costs and how long you expect to keep the mortgage. An Kentucky FHA mortgage calculator can help with this. For example, if you take out a $300,000 mortgage with no points at 4.75% and expect to keep you home for five years, does it make sense to pay points? A point costs you $3,000, and if it lowers your mortgage rate to 4.5%, the difference in your monthly payment is $45 ($1,565 – $1,520).  In five years, you would have saved $2,700. It doesn’t make sense to pay $3,000 to save $2,700. So what if you shop around for better Kentucky FHA mortgage rates and find a better lender that will drop your rate to 4.25%  for that same $3,000? Your new monthly payment is $1,476, your monthly savings increases to $89, and your savings over five years increases to $5,340. It may then be worth buying your rate down.
The 2-1 buydown
Mortgage rate buydowns are a different story. The FHA 2-1 buydown gets you an interest rate that is lower than the going rate for the first couple of years. So if the market rate on a 30-year mortgage is 4.75%, your interest rate the first year would be 2.75%, the second year it would be 3.75%, and then it would be 4.75% from year three on out. But it’s not like the lender just gives you that sweet deal for nothing. Rate buydowns require that you pay the difference upfront.
Huh?
Yep. Here’s an example of how the cost of a buydown is calculated.
Example: Standard 30-year Kentucky FHA Loan
$100,000 loan amount
8% interest rate = $8,000 a year in interest.
With the 2/1 buy-down the transaction would be as follows:
$100,000 loan amount
1st. year = 6% Interest rate = $6,000 in interest, a savings of $2,000
2nd. year = 7% interest rate = $7,000 in interest, a savings of $1,000
So the lender would charge you $3,000 now for the privilege of saving $3,000 over the next two years.
This is slightly oversimplified because the calculations are a bit more complicated, but it’s pretty much how it works. So unless you can get your seller to pay for it, there is little advantage in the 2-1 buydown for you.
The difference between buying your rate down and a 2-1 buydown is that the 2-1 won’t ever save you more than you pay for it. Buying your rate down can potentially save you more than the cost of the points.

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Kentucky FHA Mortgage Rate buy down vs paying points: The difference----Call for a free application today at 502-905-3708 or email us at kentuckyloan@gmail.com

  

For a Quick Easy Loan Approval:Have These Items Ready When You Apply For a Loan

For a Quick Easy Loan Approval:


Have These Items Ready When You Apply For a Loan

•Income Items

◦W2 forms for the last two years

◦Most recent pay stubs covering a 30 day period

◦Federal tax returns (1040's) for the last two years, if:

■you are self-employed

■earn regular income from capital gains

■earn sizable interest income, etc.

■earn more than 25% of your income from commissions or bonuses

■own rental property

■or are in a career where you are likely to take non-reimbursed business expenses).

◦Year-to-Date Profit and Loss Statement (for self employed)

◦Corporate or Partnership tax returns (if you own more than 25% of the business)

◦Pension Award letter (for retired individuals)

◦Social Security Award letters (for those on Social Security)

•Asset Items

◦Bank statements for previous two months (sometimes three) on all accounts. All pages, even if you don't think them important.

◦Statements for two months on all stocks, mutual funds, bonds, etc

◦Copy of latest 401K statement (or other retirement assets because they can count as reserves)

◦Explanations for any large deposits and source of those funds

◦Copy of HUD1 Settlement Statement on recent sales of homes

◦Copy of Estimated HUD1 Settlement Statement if a previous home is for sale, but not yet closed

◦Gift letter (if some of the funds come as a gift from a family member - the lender will supply a blank form)

◦Gifts can also require:

■Verification of donor's ability to make the gift (bank statement)

■Copy of the check used to make the gift

■Copy of the deposit receipt showing the funds deposited into bank account or escrow

◦Note: many get their statements of various kinds over the internet and these are not always acceptable to lenders, especially when the printed version does not contain the borrower's name, account number, and the name of the institution.

•Credit Items

◦Landlord's name, address, and phone number (if you rent - for verification of rental)

◦Explanations for any of the following items which may appear on your credit report:

■Late payments

■Credit inquiries in the last 90 days

■Charge-offs

■Collections

■Judgments

■Liens

◦Copy of bankruptcy papers if you have filed bankruptcy within the last seven years

•Other

◦Copy of purchase agreement (if you have already made an offer)

◦To document receipt of child support (if you desire to show it as income)

■Copy of Divorce Settlement (to show the amount)

■Copies of twelve months canceled checks to document actualreceipt of funds

•FHA Loans

◦Copy of Social Security Card (or other documentation of social security number)

◦Copy of Driver's license

•VA Loans

◦Copy of DD214

•Refinances

◦Copy of your most recent monthly mortgage bill

◦The following cannot hurt to have ready, but are not as necessary as they once were:

Copy of Note on existing loan

Copy of HUD1 Settlement Statement on existing loan


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