A home loan is one of the biggest financial decisions someone will make during their lifetime and it is crucial to make sure that you understand the terms of your mortgage loan.

One of the most critical parts of your mortgage loan is your mortgage interest rate. Several people believe that the lowest interest rate is the most important part of a mortgage loan, but this is not always true. Interest rates and the associated closing cost play an crucial roll in the home loan and both effect each other.

Home loans with the reduced interest rates will have the highest closing cost, but when closing cost is lower, the interest rate will rise. It is like a see-saw, when one side goes up, the other side goes down. This is because in order to lower your mortgage rate you have to purchase a discount point. Discount points reduce your interest rate usually by .125%-.25%.

If you take a higher mortgage rate, you will get a premium or a credit of cost that can lower your total closing cost. By taking a higher rate, the closing cost will be lower.

When searching for a home loan, it is crucial to find the balance between interest rates and closing cost. Some important questions one needs to ask when deciding the interest rate for your mortgage:

* How long will I keep the home loan or the house that I am purchasing?

* What is my breakeven mark for buying down my interest rate?

* How much money I will save over the lifetime of the home loan?

These are important questions because not everyone’s situation is the same. If you plan on keeping your loan for a short time frame (2-5 years) it might be a better option to reduce closing cost and take a higher rate, but if you plan on keeping the loan for an extended amount of time, buying down the interest rate might be the best option.

Also, when buying a property, if the seller is paying for some of your closing cost, you can use the seller credit to help lower your interest rate by buying a discount point or just reduce the total amount of closing cost. Ultimately, the decision to buy down a lower rate should be based on how long you plan on keeping the mortgage loan.

Discuss all your options with your mortgage consultant today to see what option is best for you!

David White is a Sr. Mortgage Officer who specializes in home loans. He has over 12 years experience with Southlake home loans

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