Since the mortgage crash in 2008, we have seen century-low levels in the interest rates being offered on homes. Even today, rates are at lows that haven’t been seen in 50 years.
In some ways, it has negatively impacted the consumer because it has clouded the buying process to be dominated by the interest rate, instead of the other factors that impact your mortgage payment and overall expense throughout the life of your loan. Today, we will cover the other parts of the loan program decision to show the importance of factoring in more than just the interest rate.
Remember this, if nothing else: The lowest rate loan is not always the best decision for you.
How Much Can You Put Down?
When you are looking to purchase your home, the down payment is a large portion of the cost of purchasing the property. When looking at the programs you qualify for, the lowest interest rate will always occur when you have the largest down payment. If you put down 20-30%, you will see lower interest rates because it is less risky for the bank to lend you the money.
However, what if you are starting your own company soon, or you are just getting married, or you are about to have a child? All of these events require cash in the bank, rather than locked up in your home’s equity. Instead, what a borrower could do is put less down (3-10%) which, yes, would give you a higher interest rate, but would also give you the liquid cash to take care of large payments or expenses you are expecting in the next 3-5 years.
How Long Will You Be in the Home?
This can be a great starting point when determining which product is right for you. Is this a starter home, one that you may be in for only 5-6 years? If so, it might be the best option to take an ARM loan. These programs allow you to have a lower interest rate for a fixed amount of years (typically 5 or 7), then it will adjust yearly based on the market. If you will be moving in 5-7 years, then you will not see the impact or be affected by the change in interest rate because you will be out of the home before it occurs. Do you think this is your dream home that you will stay in for the rest of your life? Wonderful. In this case we would suggest a low payment, 30-yr fixed rate mortgage that will stay consistent for you throughout the life of the loan.
How Flexible Do You Want to Be?
On any home mortgage loan in Texas, there is no “prepayment penalty”. This means that you can pay off your loan whenever you want, with no penalty. If you get set up on a 15 year mortgage, you will have a much lower interest rate than on a 30 year. However, if you went with the 30 year option, you would have the flexibility to make the payment for the 15 year or the 30 year. You will be able to pay more when you want to, but if something unexpected comes up (sickness, loss of job, family emergency) you will have the option to pull back on the payment into the more comfortable 30 year payment. Yes, you have a higher interest rate than the 15-yr note, but you are also setting up a safety net for you and your family that allows you the flexibility that is sometimes required.
Do You Want to Pay Mortgage Insurance?
Mortgage Insurance (PMI) is an extra insurance paid to the lender on any loans that have a Loan-to-Value (LTV) above 80%. For this insurance, there are 2 ways to make the payment. First, you can pay for it as a part of your monthly payment until you reach 78% LTV. Or, you can “buy out” the mortgage insurance by using a different mortgage product with a higher rate. This would give you a higher interest rate than option 1, but you will have a much lower monthly payment on option 2. Again, the question comes down to what you as a borrower are comfortable with paying per month and how long you plan on staying in the home. If you are paying 0.5% higher on your mortgage for 30 years, that is a significant difference in cost. But, if you are only paying the difference for 10 years or less, it might make more sense for you to take the lower monthly payment.
Never make a decision on your home loan based on the interest rate alone! Work with a mortgage expert like Sunray Mortgage to fully understand your options.