How To Get The Best Interest Rate For YOU

How to Get the Best Interest Rate for YOU

When it comes to getting a mortgage, it’s easy to focus on the interest rate.  But, if you only focus on the interest rate, you might be missing some of the other factors, like mortgage insurance and discount points, that could make your mortgage more expensive.

There are several factors will help create the best mortgage and interest rate available to you.

As a homebuyer, you need to make sure you are looking at the entire loan picture and how each factor can influence each other:

• the time period you plan to own the home,
• the loan product, and
• the terms of the loan

Time Period – How Long You Plan to Own

One reason to take the time to discuss the different loan programs available is to gain a better understanding of what loan product is going to work best with your budget and goals as a homeowner. When we have our pre-approval consultation, we discuss the break even points on the various costs for each mortgage.

Narrowing down the time period you plan to own the home not only allows you to discover what purpose your home will serve during that time, but it can also dictate how you can save the most money on your home financing.

You need to ask yourself questions about your finances and future, since buying a home is a commitment. An FHA loan, for example, may not be the right choice for you, but maybe it was the right choice for your friend of a family member.

In last weeks blog post, I mentioned that if you put less than 20% down, you could pay your private mortgage insurance as a one time fee at closing or pay it within your monthly payment. If you intended to only keep the home for a few years, buying out the mortgage insurance as a one time fee at closing would be the more expensive option.

What’s right for one person could be the worst decision for another, so really consider YOUR personal situation and make decisions about your mortgage accordingly.

Points — Should You or Shouldn’t You Pay

As a buyer you’ll come across a mortgage chart with examples of interest rates next to “points” or “discount points.” This is usually for 30-year fixed rate loans.

As a first-time buyer you may be confused. You’re told if you pay one point, you’re interest rate will be lower than if you pay zero points, and if you pay two points even lower.

You may ask yourself what exactly are these points and should I pay them to get a lower rate? A point is equal to 1% of your mortgage amount (or $1,000 for every $100,000). So points are basically an “upfront payment of interest” at closing. Rather than pay it over the life of your loan, you can pay a large chunk at closing to discount the interest rate.

Like the mortgage insurance, if you only intend to stay in the home for a short period of time, paying additional points may not make a lot of sense for your situation. Why? You’ll never recoup the costs of your upfront payment over the life of the loan even if lower monthly payments may seem tempting.

However, if you plan to live in your home for many years or interest rates go up, then the benefit of the lower rate will kick in and save you money in the long run. However, you’ll need to determine if you can afford to pay an extra couple thousand or more at the time of your closing for those points.

As a buyer, you will need to weigh the pros and cons in getting the lower rate and paying for points upfront. Does it work with your long-term goals as a homeowner?

Fees – Beware of Hidden Ones

Don’t be fooled by advertised rates! Behind that rate could be a long list of fees, points, or closing costs. Be sure that you are working with a loan officer that you trust — one that will go through all of the costs and fees with you.

Ask how long your rate lock is good for and if there are any fees for that. The standard lock in periods are 30 days, 45 days, or 60 days. We also have extended rate lock options up to 360 days for New Construction. Typically the longer the lock period is for, the more expensive it can be to lock in the rate. Make sure you know these details before you start shopping. This is something we go over during your pre-approval consultation. It’s another reason to get all of your finances and paperwork in order before you start shopping.

Review fees for FHA loans. Many people I chat with assume a FHA loan will be cheaper or better. When you take out an FHA loan, you pay an upfront premium for mortgage insurance (1.75% of the loan amount) which you can finance, and you’ll also pay a recurring annual cost of up to .85% of the outstanding loan amount (added to the monthly payment) for the life of the loan. We’ll review the pros and cons of these loans carefully.

Review the mortgage disclosure forms. The Loan Estimate, given within three business days after application will provide the estimated costs once you are under contract to a home, and the Closing Disclosure, given three business days before closing will provide all of your final fees.

As you can see, there are many factors or “puzzle pieces” that go into getting the best mortgage for your goals. Carefully consider all the factors covered above. I will help you go through the different scenarios that are available to you.  Remember, I’m here to help you make all of this less confusing!  I can help make sense of all the mortgage options you have and help you get the best home financing for YOU! Email me when you are ready to get started at jeng@firsthome.com