Why the Lowest Rate is NOT Always the Best Deal!
After reading this document, you will better know how to identify the best deals, and you’ll realize that it’s not always the lowest rate that’s best for you. This report will break the mold of common thinking that it’s all about rate and reveal common sense financial implications of various loan scenarios.
Myth: Fannie Mae and FHA loans offer the lowest payments available.
Fact: Not necessarily. Fannie and FHA require monthly mortgage insurance when you have less than 20% down, and the amount you need to pay depends upon how much money you put down. A program that doesn’t require mortgage insurance, even though it may have a slightly higher rate, can have a lower payment, and more tax breaks. By the way, mortgage insurance is insurance that protects the lender in case you don't pay your loan, so there's no value to you. An excellent borrower could pay $135 per month in mortgage insurance on a $150,000 loan at 100% financing. Even with a 6% rate, the payment will be about the same as a non-conventional loan at 7.5% to 8.0% with no mortgage insurance. The difference is that the mortgage insurance is not tax deductible, whereas the extra interest may be.
Myth: The lower interest rate costs less over time and I'll eventually get rid of mortgage insurance.
Fact: True, but if you’re not planning on staying in the same loan for the life of the loan, this point is irrelevant. With the average American staying in their home just under 5 years before moving on, this argument loses it weight. The savings you’ll have by not paying mortgage insurance combined with the extra tax breaks of paying extra interest instead of mortgage insurance will far outweigh any potential costs of the higher rate. This leads into why interest-only loans make sense, but that's another topic.
REAL LIFE EXAMPLE:
Client A is offered a 5.25% rate from mortgage company A, but with $289 per month in mortgage insurance. When Client A compared rates, a 6.4% rate from mortgage company B offered a lower total payment. The 6.4% had no mortgage insurance or up front discount points, the payments and up front costs were lower, much lower, making it a better deal. Client A will save thousands per year going with mortgage company B loan program. So, as you can see, it’s not always about rate. You must look at the total picture. Up front costs and monthly payment comparisons must be done to determine the best deal. |