Thursday’s Thoughts – Should I buy down my interest rate?

We get phone calls from rate shoppers every day.  Unfortunately, it’s very difficult to quote a rate over the phone because there are so many variables to calculating an accurate interest rate today.  Loan value, program type, credit score, loan amount all have a major impact on what kind of interest rate a lender can offer.

Another important variable is rather or not origination points are included in the quote.  (Watch our video explaining points here!) You could call seven lenders and get seven different quotes depending on how they are calculating your interest rate.  A lot of times the lender with the lowest rate wins out but isn’t necessary the best deal for the customer.

Why would I not want the lowest interest rate????   Great question and we’re going to answer that for you now.  Without asking the right questions you can’t assume charging points is in everyone’s best interest.  Buying lower interest rates result in lower total paid interest but also generate greater upfront expenses.  You really need to consider how long you realistically plan to keep the mortgage on the property.  Are you going to sell the home in 2-3 years?  Are you buying a small home and plan on growing your family?  Is a new job opportunity in the distant future that may require you to relocate? Are you planning on refinancing in the near future?

Here’s how you can figure out rather or not you should pay extra to get a lower interest rate.  Take the difference in the monthly payment and divide it by the difference in the total closing cost.  For example:  If you’re saving $25 month with the lower rate but you are paying $1350 more at closing then you would divide $1350 by $25.  This equates to 54 months.  This means it would take the first 54 payments (4 1/2 years) to recoop your additional closing costs before you truly started saving $25 a month.  Are you going to be there in 4 1/2 years?  Does this truly save you money in the time in which you’ll be making loan payments?

Some of you are answering no right now and some of you are saying absolutely!  Everyone’s scenario will be different and it’s not practical for a lender to assume it’s in everyone’s best interest to buy down and interest rate.  They’re simply quoting this to win over your business because most lenders on any given day should be pretty close on rate if comparing apples to apples.

Do the math the next time you take out a new mortgage and make sure you’re choosing an interest rate that’s right for you!  If you think you can benefit from a lower interest rate then click here to get started with us today.