Low Mortgage Rate Not Necessarily The Best Loan Deal
When shopping for a home loan, with the help of businesses like The Mortgage Shoppe, getting a low interest rate doesn't necessarily guarantee that you're landing the best deal. While a lower interest rate will lower your monthly payments and the amount of total interest you pay over the life of the loan, it helps to compare what several mortgage lenders or brokers are offering. Frequently, there are additional costs involved that might not sit well with your finances.
Understand What You Are Being Quoted
Mortgage interest rates can change daily. Sometimes they change during the same day. That's why the interest rate you pay on a mortgage loan is never guaranteed until you lock it in—in writing. Always ask if the rate a lender is quoting you is the lowest for the day or week. When you are home shopping, it can be to your advantage to stay informed by checking rates often.
Be sure to ask about the annual percentage rate, or APR. This number is significant to borrowers, as it includes any points, lender or broker fees, and other loan costs you may have to pay in addition to the interest rate. The APR may even include some of your closing costs.
Be clear on whether the rate is fixed or adjustable. If it's adjustable, when rates go up so will your monthly mortgage payments. The interest rates for adjustable-rate mortgages usually are lower than the rates for fixed-rate mortgages to start. Interest rates then adjust according to the schedule specified in your loan terms. This can be bad news for your household budget if interest rates are on the rise.
Know the Total Cost
Getting a lower interest rate often means paying points. Basically, when you pay points, you are buying down your interest rate. Points can be confusing when lenders quote the number of points, which doesn't tell you how much you have to pay. When comparing loan offers, ask each lender to quote points to you as a dollar amount. That way, you will know exactly how much it's going to cost you.
Although you get a lower interest rate the more points you pay, the loan will cost you more money up front. Discount points are actually prepaid interest. Since one point equals 1 percent of the loan amount, if a lender charges you two points on a $200,000 mortgage loan, you will pay $2,000 in points at closing. Unless you intend to remain living in the home for as long as it takes you to recover the cost in lower monthly payments, you might not save money by paying points to get a lower interest rate.
Weigh the Difference a Large Down Payment Would Make
While making a bigger down payment can qualify you for a lower interest rate, if you have to borrow money to finance your down payment, you might not save. For example, if you borrow from a retirement fund, you may have to pay early withdrawal penalties. In that case, the overall cost of the loan could cost you more.
Although investing your savings in a down payment for a home would earn you a guaranteed return equal to the mortgage interest rate, using the money for other investments could earn you a higher return. Keep in mind, though, that higher yield investments come at higher risk.
Depending on your personal finances, if interest rates are already relatively low, the savings might not be enough to justify emptying your bank account to make a higher down payment.
There are also other alternatives available if you don't have the money to make a big down payment. Government-back programs, such as loans insured by the Federal Housing Administration, Veterans Administration, or USDA Rural Development Guaranteed Housing Loan program, offer lower interest mortgage loans for lower down payments.