If you're looking at loans, it's important to look at more than just the interest rate - sometimes the lowest rate isn't the best deal. I've had clients get great financing, and some get not-so-great financing. From my experience, here are a few other factors to consider:
- Mortgage Insurance - unlike the way it sounds, this insurance doesn't cover the homeowner (even though the you're paying for it). Mortgage insurance provides protection to the lender, in case of default. Generally speaking, you will have to pay a mortgage insurance premium if you have less than 20% equity in your home (or put down less than 20% for a purchase). Since most first-time home buyers put a minimal down payment towards their purchase, they will usually be saddled with this cost. You may also have to pay this cost if you refinance, and don't have a lot of equity. Typically, once you have this fee, you'll be stuck with it for several years. If you can find a loan that doesn't have this fee, you'll discover you can actually save money, even if the interest rate is slightly higher.
- Up-Front Costs - Both in refinancing and new loans, factor in the up-front costs. Right now, few people are considering a buy down - paying a fee now to get a lower interest rate - but it can make sense, depending on what it costs, and how long you think you'll be in the home. Check with your lender about getting some of the fees waived - often you can cut your costs significantly, with a little negotiating.
- Shop Around - and make sure your lender knows you're shopping around. If you really want to work with a specific lender and someone else gives you a better deal, tell them. Most lenders will meet the deal if they can.
- Work With a Local Lender - if there's an issue during the process, you'll be able to go directly to your lender and get it worked out. Deal with an established institution, and make sure you're comfortable with the individual you're working with. If you're not comfortable talking to them, get someone else. I once had a client use an out-of-town lender to buy a home. It was delayed because he couldn't get them to return phone calls - it's a little harder to ignore someone if they're standing at your desk!
- Consider an Adjustable Rate - I know, they've gotten a bad reputation. There are cases, however, where it makes a lot of sense. Consider a typical ARM (Adjustable Rate Mortgage) that has the interest rate frozen for 5 years, then can adjust not more than one percentage point per year for the following 5 to 7 years. I had a client who's employer transfers him to a different state every 2-3 years. This person ALWAYS gets an ARM, since he gets the benefit of the lower rate, and isn't there long enough to see the increase. Even if you'll be there for 7 or 8 years, it can make sense, since you'll be gone before it can get too high. I had another client who plans to stay long term, but is planning to make a lump sum payment of at least $10,000 at the beginning of every year. Since his loan is around $140,000, he'll pay the principle down fast enough that by the time the rate can get very high, it will have a minimal effect. Do the math, and make the decision that makes the most sense.
Low mortgage rates are just one of the reasons to buy a home. If your loan is more than a couple of years old, chances are you should evaluate whether or not to refinance. Even a small reduction can result in big savings over the long haul - just remember to keep your eyes open and make it work out for you.
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