My two cents
Topic: Why the rate is not that important
Over the last 25 years of originating mortgage loans, inevitably, one of the first things clients ask me is “what’s the rate, or what rate can you get for me”. They are so focused on rate, rate, rate they fail to see the bigger overall financial picture. This is especially true in purchase transactions. Here are some questions that they really need to focus on:
1. What is the cost of obtaining a certain rate on any given day? There are closing costs on all mortgage loans. But, did you know that you can adjust your rate and have most if not all your closing cost covered by the lender?
By electing to take a slightly higher rate, you can put thousands of dollars of costs back in your pocket. I have never met one person that likes or wants to pay closing costs. Rates are not static; today’s hero rate can be tomorrow’s goat rate.
On purchase transactions, no cost loans can allow the client to: put more money down, have more money in the bank (who doesn’t like that), use the money for moving expenses, home improvements, etc., etc.
On refinance transactions the same applies. Why roll thousands of dollars of closing costs into your loan to get your “perfect rate”. The payment difference between and full cost loan and a low/no closing cost loan is small. If you’re already saving $200/month on a no cost loan, why pay thousands to save just a few more dollars off your monthly payment.
Sure, if you’re never going to refinance or sell your home, pay the costs. But here is my question to you: how many friends, co-workers, relatives have you talked with have never refinanced their mortgage loan?
2. Time is money
The term of the loan is biggest factor on how much interest you will eventually pay. If your main objective is cutting down the finance charge you pay, you best bet is a shorter term loan, plain and simple. Of course the payment is going rise when you drop the term. You need to select a term that meets both you interest savings goals and monthly payment budget.
3. The loan amount and down payment.
How much you borrow will have a bigger impact on your payment than your rate. More people get in trouble with because they make an emotional decision on buying a home and overbuy. Have a monthly payment figure in mind that you feel comfortable with and work the numbers backward on different terms so see how much of a loan amount it supports. I would use a rate half point higher than the average rates to be safe when calculating. Better yet, contact a seasoned loan officer to do the calculations for you.
You don’t have to spend every last dollar you have on down payment money when buying a new home to get your desired rate. There are lower down payment options that will allow you to keep you hard earned money in your bank account. No one knows what is around the corner, it’s better to have savings than not. If your adverse to paying private mortgage insurance (PMI), ask about the Lender paid mortgage insurance (LPMI). LPMI will increase your rate, but your overall monthly payments are usually lower than paying PMI with a lower rate.
Over the years I have had many customers say, “I just spoke to XX and he is offering a better rate than you”. The fact of the matter is if I offered a zero percent loan, someone would still say that. My answer is still the same, the rate is not that important and this is why…..
Bob Griffin – President SoundChoice Mortgage, LLC