Having a low interest rate on your home loan should absolutely be your priority. For almost everyone, their home loan is the largest debt they have and therefore the interest adds up more than anything else.
However, when choosing a home loan, you would most often benefit from choosing the lowest cost home loan, over the lowest interest rate home loan.
Anytime you obtain a new home loan, whether it be for the purchase of a new home or refinance of your property there are many fees involved. These include: title fees, appraisal fees, lender fees, etc., and can add up to thousands of dollars.
For that reason, while it is important to make sure you have a good interest rate on your home loan, you may want to consider options that could lower your upfront costs of your home loan. Even if that means not obtaining the absolutely lowest interest rate possible.
Let’s take a look at two examples, where this might make sense.
Lower Your Costs – When Purchasing A Home:
When purchasing a home, you have thousands of dollars’ worth of fees involved in the process. If the seller does not agree to pay your closing costs, that is coming out of pocket and will be added as a cost to you, on top of your down payment.
Now, there is exact number, but often times if you raise your interest rate by around .375% higher, then the lowest available rate, you may be able to get a credit to cover all of your closing costs.
For example, let’s say:
- You are purchasing a home at a $250,000 and your putting a 5% down payment
- Your closing costs are $5,500
In this above scenario, even if it takes raising your interest rate by .375% to get a $5,500 credit, your payment would only increase by $52 per month, from if you didn’t take the credit and paid all of your costs.
That means it would take you 106 months (almost 9 years) to break even, by taking the lowest rate over the lowest payment. The average consumer sells their home or refinances their home loan, in less than 5 years.
So even if you are buying your forever home, unless you are putting a very large down payment and planning of the loan quickly, you might want to consider seeking out the lowest cost over the lowest rate. When you inevitably do sell or refinance down the road, you may feel a lot smarter that you saved the closing costs up front.
Lower Your Costs – When Refinancing A Home:
Normally most consumer will choose to roll the cost of their refinance into their new home loan. Many lenders will even sell the loan that way, telling consumers that “nothing is out of pocket”. However, after the completion of the refinance, when your first new mortgage statement comes in the mail, the sticker shock sets in, when you see your new inflated loan balance.
That is because much like on a purchase, there are thousands of dollars in fees on a refinance as well. Therefore, the same logic applies, as on a home purchase loan, look for a great but also the lowest cost.
Often times on a refinance, you can raise your interest rate as little as .25% above the lowest available interest rate and receive a lender credit to cover all of your closing costs.
Much like the example above on the home purchase loan, it will often take you many years, to recoup those costs.
- You are refinancing a home loan with a $250,000 balance
- Your closing costs are $3,000
In this above scenario, even if it takes raising your interest rate by .25% to get a $3,000 credit, your payment would only increase by $34 per month, from if you didn’t take the credit and paid all of your costs.
That means it would take you 88 months (over 7 years) to break even, by taking the lowest rate over the lowest payment.
In both instances above and in many real world cases, the lowest cost could save you money up front and be better the long term option for a home loan.
As always, it makes sense to speak to a trusted lender, such as Strategic Mortgage to fully qualify and see what home loan options are available to meet your specific situation.
For more information on current home loan programs and options for existing and potential home owners, please contact Bill Kamboukos of Strategic Mortgage at (480) 703-5844 or by emailing: firstname.lastname@example.org or online at http://www.strategicmtgaz.com
Vasilios Kamboukos – NMLS#160440