| Why The Lowest Mortgage Rate Is Not Always The Best Option |
| Articles - Mortgage |
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A mortgage is one of the biggest financial decisions you will make during your lifetime and it is important to make sure that you understand the terms of your loan.
A mortgage is one of the biggest financial decisions someone will make during their lifetime and it is important to make sure that you understand the terms of your home loan. One of the most important parts of your mortgage loan is your loan interest rate. Several 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 crucial 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 decreases, the interest rate will rise. 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 buy 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 lower your total 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 closing cost and interest rates. Here are some important questions you need to ask when deciding the interest rate for your home loan: * How long will I keep the mortgage loan or the house that I am buying? * What is my breakeven point for purchasing down my interest rate? * How much money I will save over the lifetime of the loan? These are important questions because not all home owners are in the same situation. 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 might 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 purchasing a discount point or just decrease 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 mortgage loan. Discuss all your options with your mortgage advisor today to see what option is best for you! DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. David White is a Sr. Mortgage Officer who specializes in home loans. He has over 12 years experience with Southlake home loans |