Posted on: 01st Apr, 2008 06:17 am
I posted earlier, but just as background, my fiance and I are trying to select a mortgage and need advice on shopping around. I've found what appear to be some pretty good rates on Amerisave.com, but I'm a bit confused. On their website, you give them some basic information (loan and down payment amount, what kind of credit score you have - good, excellent, etc.), and they give you a list of loans that might "meet your needs." For each loan, it tells you the interest rate, monthly payments, APR, lender points and fees, and closing costs. For the most part, the fees go up as the interest rate goes down. So my question is - how do you weigh interest rates vs. fees in choosing a loan? Is it better to get a 5.375% rate with $2500 lending fees or a 6.000% rate with $500 lending fees?
Also, will the lending fees and closing costs be rolled into the mortgage, or will we need to pay those at closing?
Also, will the lending fees and closing costs be rolled into the mortgage, or will we need to pay those at closing?
Hello Dominique,
You have a great question that I have often heard from my customers. Normally we hear in the news that rates went up or down and the average consumer simply takes that at face value. In reality What happens is that the cost involved to get a rate simply moves up or down. To put this in your prespective I would like to use this example. How to figure out if getting a lower rate by paying higher closing costs is a matter of calculation. Per your query you are getting 5.375% vs 6% for an additional cost of $2000.00. Now I dont know your loan amount but I will use a $200,000.00 loan to illustrate my point. at 6% the interest for this loan will be around $1000.00/month. at 5.375% it will be $894.00. so you will save about $104 on the lower rate. Should you do that you have to pay an additional $2000. Right??!! So if you devide 2000/104=20 months this tells you that spending the extra 2000 will give you an average interest saving of about $100+ a month. If you have the funds available to pay this extra cost and forsee staying in this house for a long time then it may make sense to essentially buy the rate down.
However I always want to caution customers to not spend all their savings in closing costs as typically you will have added expenses in your 1st year of buying the home. So do the math and see if you feel you want to spend the extra money now for savings in the future. If you stay in this home long and more importantly keep this mortgage for a long time then it may make sense to pay the extra cost.
You have a great question that I have often heard from my customers. Normally we hear in the news that rates went up or down and the average consumer simply takes that at face value. In reality What happens is that the cost involved to get a rate simply moves up or down. To put this in your prespective I would like to use this example. How to figure out if getting a lower rate by paying higher closing costs is a matter of calculation. Per your query you are getting 5.375% vs 6% for an additional cost of $2000.00. Now I dont know your loan amount but I will use a $200,000.00 loan to illustrate my point. at 6% the interest for this loan will be around $1000.00/month. at 5.375% it will be $894.00. so you will save about $104 on the lower rate. Should you do that you have to pay an additional $2000. Right??!! So if you devide 2000/104=20 months this tells you that spending the extra 2000 will give you an average interest saving of about $100+ a month. If you have the funds available to pay this extra cost and forsee staying in this house for a long time then it may make sense to essentially buy the rate down.
However I always want to caution customers to not spend all their savings in closing costs as typically you will have added expenses in your 1st year of buying the home. So do the math and see if you feel you want to spend the extra money now for savings in the future. If you stay in this home long and more importantly keep this mortgage for a long time then it may make sense to pay the extra cost.
The most simple way to figure it out is to do the math.
If you intend to stay in this particular home with this particular mortgage you can use an amortization calculator to show you how much you would save with the lower rate over time.
If your going to be in the house for a shorter period of time or plan to refinance then taking the lower fee's may be the better option.
Here is a link to an amortization calculator: "http://www.fivestarsmortgage.com/calc-amortization/"
[Link deactivated as per forum rules. Thanks.]
If you intend to stay in this particular home with this particular mortgage you can use an amortization calculator to show you how much you would save with the lower rate over time.
If your going to be in the house for a shorter period of time or plan to refinance then taking the lower fee's may be the better option.
Here is a link to an amortization calculator: "http://www.fivestarsmortgage.com/calc-amortization/"
[Link deactivated as per forum rules. Thanks.]
i like al's analysis of the situation.
i agree, that if you can see sense in paying the additional sum now to reduce the immediate interest costs; by all means do so. if you feel it wise to have cash on hand in the event of other surprises, that's the way to go. there is actually a happy medium somewhere as well.
a reasonable lender will help you make this analysis and give you the appropriate comparisons when you sit down, also.
i agree, that if you can see sense in paying the additional sum now to reduce the immediate interest costs; by all means do so. if you feel it wise to have cash on hand in the event of other surprises, that's the way to go. there is actually a happy medium somewhere as well.
a reasonable lender will help you make this analysis and give you the appropriate comparisons when you sit down, also.
