We all know that interest rates have been at historic lows for a while. You have to go all the way back to 2009 to find an average annual rate that was over 5%. So far this year, the highest monthly rate we’ve seen has been 3.87% back in January. We’re down to around 3.5% now, which makes this a great time to buy a home. You’re probably never going to be able to get a cheaper mortgage than you can right now.
Always shop for a cheap mortgage.
Homebuyers, even experienced ones, often have trouble figuring out how to get the cheapest mortgage. It’s complicated. You don’t only have the interest rate to factor in. You also have to calculate how closing costs and discount points are going to impact both your monthly mortgage payment and the total amount you’re going to pay over the life of your loan.
Before we do the math, let’s review some terms.
- Mortgage rate is the percent in interest you’ll pay to the lender. Mortgage rates move up and down based on market factors that are outside the lender’s control.
- Closing costs are the fees that the bank charges you for processing your mortgage. They can include things like the costs to the lender of doing the appraisal on your house and checking to make sure the title is clear. Lenders sometimes offer mortgages with no closing costs, but they make up for it with a higher interest rates.
- Discount points are a way for buyers to reduce their interest rates. Lenders will charge a fixed dollar amount up front, and in return the borrow pays less interest.
Now let’s look at how the numbers break down.
Scenario #1: $200,000 mortgage, 3.5% interest rate, 3% closing costs rolled into the mortgage, no discount points.
Total cost of 30 year mortgage: $333,012
Monthly mortgage payment (not including taxes and insurance): $925
Scenario #2: $200,000 mortgage, 4.5% interest rate, no closing costs, no discount points.
Total cost of 30 year mortgage: $364,813
Monthly mortgage payment (not including taxes and insurance): $1,013
Scenario #3: $200,000 mortgage, 3.25% interest rate, 3% closing costs rolled into the mortgage, $2,000 fee for discount points rolled into the mortgage.
Total cost of 30 year mortgage: $325,882
Monthly mortgage payment (not including taxes and insurance): $905
Scenario #3 seems like the best option, right? The math only works out on this one if you plan to stay in your house long enough so that the break in interest payments is greater than $2,000. In this case, it would take about eight years to reach that point. More points will take longer.
The takeaway here is that there is no one right answer for everyone. But here are a couple of tips that will help you figure out what will work best for you.
1. Have a plan. Are you going to stay in your house for three years or thirty? The longer you’ll stay, the more you’ll benefit from a lower interest rate.
2. Shop around. Don’t just go to one bank or mortgage broker. Get different quotes, and compare them. They all have to make money one way or another, but some of them are looking to make a little more than others. Comparison shopping is the best way to make sure you’re getting the cheapest mortgage you can.
At Loeffler Realty, we can help.
It’s not easy to figure out which of your mortgage offers is going to be the cheapest in the long run. If you need help running the numbers, contact us today We can help our buyers make the right decision when they’re looking for a cheaper mortgage.