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Mortgage 101 - What's The Best Rate For
Me?
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Selecting the most appropriate interest
rate is one of the greatest
challenges borrowers face during the mortgage process. Most people feel
they should get a rate as low as possible. However, rate selection
should be an economic–not an emotional–decision.
We use the term “rate
selection” because reputable mortgage companies
offer borrowers a range of rates from which to choose. The most
economically beneficial rate is not always the lowest rate.
For example, suppose a
borrower could get a $100,000 loan at 8.00% with
no origination fee or discount points. The payment would be $733.76.
Instead, however, the borrower chooses an alternative rate – 7.5% – and
pays a 1% origination fee and one discount point for a total of $2,000
in extra closing costs. The payment drops to $699.21, a monthly savings
of $34.55. It takes about 58 months for the monthly savings to offset
the increased closing costs. Beginning in the 59th month, the borrower
will realize an actual savings of $34.55 a month. However, if the loan
is paid prior to the 58th month, the borrower has spent money
unnecessarily.
Particularly noteworthy
is the fact that, in this case, the 7.5% had a
lower APR associated with the loan. Hence, using APR as the sole
criterion for selecting a rate is unwise. In comparing APRs, you must
consider how long you expect to have your mortgage.
Some borrowers use
discount points as part of their overall tax
strategy. Discount points are typically deductible in the year they are
paid (see your tax advisor for detailed information), so they reduce
the current year tax liability while providing a lower payment for the
life of the loan. Don’t forget, however, that the lower interest rate
will affect future tax savings.
A similar tax strategy
is the use of a “buy-down,” which is a temporary
reduction of the interest rate. Click here to go to “What is a buy-down?”
Sometimes the selection
of a lower interest rate is driven more by the
amount of the mortgage payment the borrower can afford (qualify for)
rather than the economic value.
My mortgage team
and I remain up-to-date with the various
mortgage rates, options, loan choices and alternatives and is an
invaluable resource for any home buyer or home owner who is considering
refinance.
We are committed to providing you with mortgage services
that exceed your expectations.
Feel free to
browse my decision-making
tools and calculators.
When you are ready
to discuss mortgage options give us a call. (916)
899-4839
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