Most Important Thing to Know
The lowest interest rate loan is often the most expensive loan.
How Long you Own the Home Does Not Equal How Long you Keep the Mortgage
Even if you are buying your “forever home”, that does not mean you are securing your “forever loan”. Homeowners often assume that they will keep their mortgage for the same period of time that they live in the home. This assumption is almost always incorrect. Statistics show that the majority of homeowners will refinance multiple times throughout their lifetime.
Low Rate vs. Low Cost
Buyers Beware! This saying not only applies to your actual home selection- but also to the lender that you choose for your mortgage.
Many lenders will resort to misleading a borrower by quoting a low interest rate that will end up adding additional costs to the loan. These additional fees are sometimes hidden as origination fees, miscellaneous fees, points or even called a buydown. The borrower might obtain a lower interest rate but will end up paying more money at closing, sometimes thousands more! Depending on the lender, these fees and additional costs may or may not have been fully explained when you were rate shopping.
How long do you plan on staying in your home?
This is a major factor to consider. According to a 2021 report done by the National Association of Realtors: Overall, buyers expected to live in their homes for a median of 15 years. For buyers aged 22 to 30, the expected length of time was only 10 years compared to 20 years for buyers aged 56 to 74 years.
Here are some reasons why paying a large amount of costs upfront might NOT be your best option:
- You may prefer to pay less in closing costs and use that money to put down a larger down payment which will improve your equity position.
- You may want to refinance if interest rates improve
- You may want to refinance to a shorter term
- You may want to refinance to remove mortgage insurance (if applicable)
- You might need to move in the future because of a growing family
- You need to downsize to get ready for retirement
- You might need to relocate to secure new employment
- You might need to move closer to family members
- You might want to do a cash-out refinance in the future to pay bills or other expenses
If you think any of these situations might apply to you in the future, then the additional cost may not be worth it. When you call Mortgage Warehouse, we can go over your circumstances and figure out your break even point (how many years you need to keep your loan in order to absorb the cost and start reaping the benefits of the lower rate) . We can help you decide which option is best for you.
On the other hand, if you are planning on staying in your new home for several years, it might make sense to look at the low rate option. This is a great strategy for lowering your monthly payment and saving on the amount of interest you pay in the long run, assuming you keep the mortgage for many years. The typical break even point for loans with higher costs upfront can be between 5 to 7 years and after that you are saving money for the remainder of the loan.
So, what does this all mean when rate shopping?
First, you need to make sure you are not comparing apples to oranges. By that we mean, if one lender is quoting you a rate with points and one isn’t, it is going to be hard to compare. At Mortgage Warehouse, we can provide you a low cost option and a low rate option and provide you some guidance on which one might be the better fit for you.
Beware of the lenders who do not disclose that they are assessing points to lower your rate. Not only will you be paying more at closing to get this “lower rate”, you will also be working with a lender that you cannot trust.
Here at Mortgage Warehouse, we get many callers wanting us to beat a low rate given by another lender. However, the extra costs were never explained to them and their life circumstances were never considered.
We take pride in knowing that when we provide you with your rate quote options, you will not only fully understand the difference, but you will come away with the knowledge that we discussed every scenario and devised the best choice for your particular needs- which isn’t always the lowest rate.