Higher rate better for second trust

Q:Should I pay an origination or discount fee to get a lower rate on a second fixed

mortgage? Also, is a 20-year term appropriate if I should stick with a 10- or 15-year mortgage? I don’t want to touch my first, which is at 5.875 percent, 30-year fixed.

A: My advice remains the same for second trust fixed-rate mortgages as it does for first-trust loans: Keep the fees and points down and take a higher rate. Paying points in order to receive a lower note rate on a second trust mortgage is actually a little bit more expensive than 30-year first trust loans.

As I peruse through my wholesale rate sheets, I see that it will cost a borrower about 1.75 points per ½ percent drop in interest rate on a 30-year, fixed-rate first trust loan.

This results in additional charges of $5,250 on a $300,000 loan, for example. The payment difference per ½ percent in rate is about $100 per month. Without taking into consideration tax issues or interest income, it would take 53 months to recoup the points in the form of a lower payment.

In order to buy down the interest rate on a fixed-rate second trust, I see that it will cost 2 points for every ½ percent drop in rate. Since second trust loan amounts are usually smaller, let’s use a $50,000. At 7 percent, a 20-year amortization results in a monthly payment of $388. At 6.50 percent, the payment drops to $373.

Paying 2 points, or 2 percent of the loan amount upfront, will cost the borrower $1,000 to save a measly $15 per month. It will take the borrower 67 months to recoup the points.

My advice sticks. Don’t get wrapped up in a seemingly low interest rate that carries high points and fees. Keep the cash invested so you don’t have to wait 67 months to get your money back.

Deciding the term of the second trust is a matter of choosing a program that meets your objectives. A shorter term means the overall interest that’s paid out will be less. Shorter-term loans also usually carry a lower note rate.

Since shorter-term loans are paid off earlier, they also carry a higher monthly payment.

A good loan officer can run some scenarios and help you decide which program best fits your overall objectives.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail (henrysavage@ pmcmortgage.com).