How to Get the Best Interest Rate

When applying for a mortgage, it’s easy to focus on the interest rate.  But, if you only focus on the interest rate, you might overlook some “hidden” fees that make getting that interest rate more expensive.

It sounds counterproductive but it isn’t. Several factors can help create the best mortgage and interest rate available to each of us.

As a homebuyer, you need to make sure you are looking at the entire loan picture and your situation and how each factor can influence each other:

– how long you plan to live in the home

– loan product

– terms of the loan

Time Period – How Long You Plan Live in the Home

It’s crucial to shop around and talk to different lenders to get a sense of what loan products will work best with your budget and your goals as a homeowner.

You need to contemplate and ask yourself questions about your finances and future since buying a home is a big commitment. That’s why the “go-to” 30-year fixed loan may not be the right choice for you but was for your friend or a family member.

If you don’t plan on owning the home for more than 5 or 6 years, you might want to consider an adjustable-rate mortgage (ARM). These loans typically offer a substantially lower interest rate, saving you thousands of dollars while you live there.

The ARMs of today are much better, safer, and more conservative for homeowners than the ones in the past.

It’s worth considering an ARM if you really aren’t going to own the home for more than a few years. If you invest the extra money you’d save with your monthly mortgage payment because of its lower rate, you could really do much better than having had higher mortgage payments with the 30-year fixed loan.

This recommendation can be difficult for many people. What’s right for one person could be the worst decision for another, so really consider YOUR personal situation when making decisions about your mortgage.

Points — Should You or Should You Not Pay

As a buyer, you’ll come across a mortgage chart with examples of interest rates next to “points” or “discount points.” This is usually for 30-year fixed-rate loans.

As a first-time buyer, this can totally be very confusing. You’re told if you pay one point, you’re interest rate will be lower than if you pay zero points, and if you pay two points even lower.

You may wonder what exactly are these points and if you should pay them to get a lower rate. A point is equal to 1% of your loan amount (or $1,000 for every $100,000). So points are basically an “upfront payment of interest” at closing. Rather than pay it over the life of your loan, you can pay a large chunk when you get the mortgage.

When interest rates are low and if you’re not planning to stay in your home for 5 years or more, then paying points doesn’t make sense. Why? You’ll never recoup the costs of your upfront payment over the life of the loan even if lower monthly payments may seem tempting.

However, if you plan to live in your home for many years or interest rates go up, then the benefit of the lower rate will kick in and save you money in the long run. Take note that it’s important for you to determine if you can afford to pay an extra couple thousand or more at the time of your closing for those points.

As a buyer, you will need to weigh the pros and cons of getting the lower rate and paying for points upfront. Does it work with your long-term goals as a homeowner?

Fees – Be on the Look Out For Hidden Ones

Don’t be fooled by advertised rates! Behind that rate could be a long list of fees, points, or closing costs. Always ask the lender for a breakdown of fees and to give you the total amount for closing the loan.

Avoid penalties for lock-in extensions. Some lenders will slightly increase your interest rate if you need to lock in your loan for 60 days or more. Make sure you know any and all requirements before signing paperwork.

Review fees for FHA loans. Don’t always assume an FHA loan will be cheaper or better. Not only do you pay an upfront premium for mortgage insurance (1.75% of the loan amount), but you’ll also pay a recurring annual cost of up to 1.35% of the outstanding loan amount (added to the monthly payment) for the life of the loan. Review the pros and cons of each loan product carefully.

Take advantage of the mortgage disclosure forms. Lenders are required to provide the Loan Estimate, given three business days after application, and the Closing Disclosure, given three business days before closing. Hence, there is no excuse for buyers not to know about “hidden fees” with these disclosures. 

There are many factors or “puzzle pieces” that go into getting the best rate for your mortgage. Carefully consider all these factors and play out different scenarios.  You can always reach out to me to make all of this less confusing and I would love to connect you to vetted local lenders to help you get the very best interest rate possible.