It goes without saying that you should never get mortgages with bad interest rates. But should you always go for the best rates?
Interest Rates and (vs) Closing Costs
What you plan to do with your property determines whether you get a loan from the lender that’s offering you the lowest rates or a lender that’s offering you higher rates.
That is due to closing costs and the time it takes to recoup them.
If you plan to have the loan for a short period of time, often, it makes sense to accept a slightly higher interest rate (because the lender with the slightly higher interest rate has closing costs that are a lot lower).
If you’re going to hold onto the loan for years and years, the lowest interest is the best way.
How do you know if it’s worth to go with the slightly higher interest rate in a particular case?
|Closing costs: $3,900||Closing costs: $4,900|
|Interest rate: 4.000%||Interest rate: 4.250%|
|Amortization: 30 years||Amortization: 30 years|
|Loan amount: $200,000||Loan amount: $200,000.|
|Manual Underwriting||Automatic Underwriting|
|Mortgage payment (principal and interest): 954.83||Mortgage payment (principal and interest): 983.88|
The difference in the above case in monthly mortgage payments is: $29. The difference in closing costs is $1,000.
$1,000 divided by $29 equals: 34.48. It would take 34.48 months to recover the difference in closing costs. So, in this case, if you hold loan less than 34 months, it’s better to go with the 4.250% rate.
Notice, my calculations do not take into account inflation / deflation. Also, my calculations do not take into account opportunities lost. That is to say, sometimes, having $1,000 right now is better than having it and a bit extra later.
How to Approach Current Mortgage Rates
When you’re looking at current mortgage rates, read the ads’ fine print. You need to compare apples to apples. I mean, a 15-year fixed loan is always going to have a lower interest rate than a 30-year fixed loan.
And keep in mind that different lenders have different takes on how risky it is to lend against a 3-unit or to a borrower who has a middle FICO score of 660, or to a borrower who’s loan amount is $80,000 (or $250,000).
That means, you use the advertised rate as a starting point and get actual loan estimates from your top choices (and you do it at the same time).