The Best Rate May Not Be the Best Deal

Purchasing a home is a complicated process. You found the best realtor, the best house, the best inspector, and the best lawyer. Do you really need to spend time shopping for the best mortgage? Yes. Really! You may be tempted to jump at the first lender who flashes a low interest rate at you. However, that low rate may not be your best deal. If you're as choosy about your mortgage as you are about your house, you could save a lot of money over the long term.

The Rate You See May Not Be the Rate You Get. There can be a wide discrepancy between advertised mortgage rates and the rate you're actually eligible for. These differences are due your borrowing conditions which include:

Type of mortgage

Market conditions

Type of property to be purchased

Personal credit history

For their lowest rates, lenders often assume you: Have a credit score of 720

Are a US citizen

Can document your income

Will make a 20% down payment

Use the loan for a single unit primary residence

This doesn't mean you can't get a loan if your circumstances differ from those assumptions, but it does mean you may pay more for it than the advertised rates. The Same Rate Will Mean Different Things for Different Mortgages. When shopping for mortgages, it's important to not to compare apples and oranges. If you lay the facts out side-by-side, you might realize that a 7% fixed-rate mortgage could actually end up being cheaper in the long run than a 5% adjustable rate mortgage (ARM). Interest rates reflect the degree of risk assumed by the lender. If a bank gives you a fixed-rate mortgage at 7% APR, and ten years later the prevailing rates rise to 12%, they have no choice but to continue servicing your mortgage at the rate you locked in. And that's why interest rates for fixed-rates tend to be a little higher. You're paying for security. For lower rates, like those offered through an adjustable rate mortgage, you assume the risk of higher interest rates and monthly payments. Your 5% rate could be 9% in five years, with a jump in monthly payments that would make your jaw drop. And Murphy's law being what it is, you can assume that interest rates will go up at exactly the same time that Junior starts his first year of college. To protect yourself from such a fate, make sure you understand the worst-case scenario for the loan you are considering. It might make that low interest rate look just a little less enticing. You'll also find mortgages out there that are a complex mixture of adjustable and fixed rates, offering one interest rate at the beginning, and another later on. These sorts of hybrid-deals are dreamt up to make buying a home more affordable in the short term. And you in turn may be lured into them with thoughts your income will continue to grow, you'll win the lottery, whatever. Just remember they're a gamble. And it can be a scary thing to base your home purchase on a game of chance. Don't Forget the Closing Costs - Closing costs are not just frosting on the cake. They are also the ribbons and flowers and fruit filling and little plastic bridges and fountains of your mortgage. You'll pay between 2 and 7 percent of your mortgage for all this frippery. However, some lenders may charge more extra fees than others. That means that a loan package with a relatively unexciting interest rate might turn out to be a real bargain when the closing costs are figured in. You can shop for the best closing costs by asking potential lenders for an estimate before you apply or commit. (After completion of your loan application, you'll also receive a "Good Faith Estimate" that itemizes your projected closing costs. Remember that this too is an estimate only, and actual charges at closing may be a little different.) Typical lender-related closing costs include:

Appraisal fee

Points

Credit report fee

Loan origination and processing fees

Recording fees and transfer taxes

Title search fee

As a last word, it's always best to double check rates with a healthy dose of diligence and a pocket calculator. Do some comparison shopping, choose the best loan for your individual situation and budget, and pay special attention to the total cost of the loan (not just the rate), and you'll increase your chances of getting a good, fair deal.

One should consult with a qualified mortgage planning professional prior to implementing any mortgage planning strategies. If you are a real estate planning, insurance, tax or financial planning professional receiving this newsletter, please call our office and introduce yourself to us. We are always seeking to grow our referral network and expose more service professionals to our client base.