Why The Lowest Mortgage Rate Is Not Always The Best Option
A mortgage is one of the major financial decisions you will make during your lifetime
and it is important to make sure that you understand the terms of your mortgage loan.
One of the most important parts of your home loan is your mortgage interest rate. Many home owners believe that the lowest interest rate is the most important part of a home loan, but this is not always true. Interest rates and the associated closing cost play an important roll in the home loan and both effect each other.
Home loans with the lower interest rates will have the most closing cost, but when closing cost reduced, the interest rate will increase. It is like a see-saw, when one side goes up, the other side goes down. This is due to the fact that to lower your mortgage rate you have to purchase a discount point. Discount points lower your interest rate usually by .125%-.25%.
If you take a higher home loan rate, you will receive a premium or a credit of cost that can be applied to the closing cost. By taking a higher rate, the closing cost will be lower.
When shopping for a mortgage, it is crucial to find the balance between interest rates and closing cost. Some important questions one needs to ask when deciding the interest rate for your home loan:
* How long will I keep the loan or the property that I am purchasing?
* What is my breakeven mark for buying down my interest rate?
* How much money I will save over the lifetime of the loan?
These are important questions because not everyone's situation is the same. If you plan on keeping your mortgage for a short time frame (2-5 years) it might be a better option to reduce closing cost and take a higher rate, but if you plan on keeping the loan for an extended amount of time, buying down the interest rate will be the best option.
Also, when purchasing a house, if the seller is paying for some of your closing cost, you can use the seller credit to help lower your interest rate by purchasing a discount point or just reduce the total amount of closing cost. Ultimately, the decision to buy down a lower rate should be based on how long you plan on keeping the loan.
Discuss all your options with your mortgage consultant today to see what option is best for you!
by: David G White.
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