How to Get the Best Interest Rate
(Or should that be the best “program”
for your home mortgage)
by: Kathleen Mary Andersen
Mortgage lenders. You can’t escape them. Whether you turn on your television, your radio, get a call from a telemarketer and just about every website, you are promised the best deal in town.
Claims about the lowest interest rate, no closing costs or hidden fees, can confuse the best of us. The question remains, how do you find the right one? More importantly, how do you find not just the best rate but the best program to meet your financial needs?
Shopping for a mortgage can be confusing. We must first understand that a home mortgage is simply a tool in your financial future. Your home needs a financial plan. How long do you plan on keeping your home? What much can you afford a month? There are easily over 50 different mortgage programs available on the market today and interest rates do begin at 1.25% . But is this for you? Is there a catch? How do you choose?
After you determine your goal, the rest is easy. Is a 30 year fixed rate best for you if you plan on selling the home within 5 years? Is this your first home or your last home? Will your house need to grow with your future family and your future income? The American Realtor Association survey has shown that 90% of all homeowners sell within the first 7 years.
The lowest or best interest rate today can be either 1.25% or it can be 9% depending on what type of program, your credit worthiness or simply what your financials goals may be. If you do not see yourself living in your home in the year 2037, then a 30 year fixed rate might not make sense to your plan. If your credit is not so hot, then 9% might look terrific if you are set on owning a home of your own. There are many right rates for many people.
Let’s go shopping. Three phone calls can determine what company and product can work for you. Every company has a variety of different mortgage products. A loan representative can show you an amortization of different plans and different rates.
Do adjustable rates make you dizzy? Over 65% of all home mortgages held by banks are adjustable rate mortgages. And there are many adjustable rate programs. Some are based on fast moving indexes, some carry teaser rates and some based on the slower indexes such as savings. There are also lower rates fixed at a shorter term such as a 5 year note or 7 year note.
If this is your first home, your job will be on the upswing over the next 5 years, an alternative is to look at three options.
A 30 Year Fixed Rate at 5.75%. Payments are $ 567.00 without taxes and insurance. In 5 years you will have paid the bank 12,560.00 in interest and earned $4,500 in equity. It’s called the “banker’s secret”. Is this enough equity to buy a new home considering the market appreciation in 5 years.
A 5 Year Fixed Adjustable Rate Mortgage: Payments are fixed for 5 years at 4.50%. A lower rate but you felt comfortable making that 30 year fixed rate payment above and you do plan to move up in the housing market. Take advantage of a lower rate but make payments as if it was that 30 year program above. The overage goes to your principle and you have earned a whopping 10,000 in equity over 5 years.
A Savings adjustable (COFI) has an option rate beginning at 1.95% or an actual rate of 5.50%. You can make a payment of either 450.00 per month on a 150,000 loan or the actual payment of 650.00 Why would someone want this program? Savings rates are not as volatile as other index. The rate may go up but what goes up also comes down over a 5 year period. Secondly, this program allows you to make a payment in between the 1.95 and the 5.50. The major benefit is that any principle you add each year is credited every 12 month period. It is automatically deducted from the balance you owe. That alone can bring your equity up almost to 3 times the amount of a fixed mortgage.
Bankers sell many types of programs because they know that there are many types of home owners and that each home owner has a particular plan in mind. ‘No’ closing costs usually means a higher rate. The costs are built into the rate. Over a 5 year period, you pay more than if you have taken the closing costs up front. Lower interest rates with some closing costs added to the loan might be a better option for paying less interest. If you pay points or origination, can you recover that over the time you will keep the house?
The goal is to find not only someone who can show you different options but someone that you can feel comfortable with handling the biggest investment we make in our lives: our home. Trust, product knowledge and making it your choice is important. After all, the key is that when the transaction closes, it is you, the homeowner that must be happy in making the payment each month.