Selecting the Best Interest Rate for You
Selecting the most appropriate interest rate is one of the greatest challenges borrowers face during the mortgage process. Most people assume they should get the lowest rate possible. However, rate selection should be an economic—not an emotion—decision.
We use the term "rate selection" because reputable mortgage companies offer borrowers a range of rates from which to choose from. The best rate for the long run is not always the lowest rate.
For example, suppose a borrower could get a $100,000 loan at 8% with no origination fee or discount points. The payment would be $733.76 (principal and interest only). Instead, however, the borrower chooses an alternative rate - 7.5% and pays a 1% origination fee and one discount point for a total of $2,000 in extra closing costs due at the closing of the loan. The payment drops to $699.21 (principal and interest), a monthly savings of $34.55. It takes about 58 months for the monthly savings to offset the increased closing costs. It is not until the 59th month that the borrower realizes an actual savings of $34.55 a month. However, if the loan is paid off prior to the 58th month—such as when a loan is refinanced—the borrower has spent money unnecessarily.
Particularly noteworthy is the fact that, in this case, 7.5% had a lower annual percentage rate (APR) associated with the loan. Hence, using APR as the sole criteria for selecting a rate is unwise. In comparing APR you must decide how long you expect to have your mortgage. To learn more about APR, read my article APR - What Is It and How Does It Affect Your Loan?
Since discount points are typically deductible in the year they were paid (see your tax advisor for more information), they reduce the current year tax liability while providing a lower payment for the life of the loan. Do not forget that the lower interest rate will affect future tax savings.
When selecting a home loan, you need to base your selection
on more factors than which one has the lowest interest rate.
A Responsible Mortgage Professional who is up-to-date with the
various mortgage alternatives can help you select the loan that
works best for your unique situation. That’s why it’s
important to make sure the loan officer you choose has the ability
and desire to provide you with competent service and current
information.
