A mortgage loan is one of the major financial decisions you will make during your lifetime and it is crucial to make sure that you understand the terms of your mortgage loan.
One of the most critical parts of your mortgage loan is your mortgage interest rate. Many people 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 crucial roll in the home loan and both effect each other.
Home loans with the reduced interest rates will have the most closing cost, but when closing cost is lower, 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 interest rate you have to purchase a discount point. Discount points reduce 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 lower your total closing cost. By taking a higher rate, the closing cost will be reduced.
When searching for a mortgage, it is crucial to find the balance between interest rates and closing cost. Here are some important questions one needs to ask when deciding the interest rate for your home loan:
* How long will I own the property I am buying or how long do I plan on keeping the loan?
* What is my breakeven point for purchasing down my interest rate?
* How much money I will save over the lifetime of the mortgage?
These are important questions because not everyone’s situation is the same. If you plan on keeping your loan for a small amount of time (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 mortgage for an extended amount of time, buying down the interest rate will be the best option.
Also, when buying a property, if the seller is paying for some of your closing cost, you can use the seller credit to help lower your interest rate by buying 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 home loan.
Discuss all your options with your mortgage adviser today to see what option is best for you!
David White is a Sr. Mortgage Banker who specializes in home loans. He has over 12 years experience with Southlake home loans
categories: mortgages,real estate,home loans,mortgage,mortgage rates,loan rates,finance,business and finance
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