What determines the interest rate on your mortgage?
MANY factors come into play when determining what your interest rate will be on your mortgage. These factors include, but are not limited to, current market conditions that can change DAILY, credit score, how much you are putting down on the purchase price (down payment), loan program or type, government or conventional, debt to income ratio, specific investor overlays …. The list goes on.
When we speak with someone regarding a mortgage, we often hear, “Well, my neighbor got…” or “My sister got … so I want that rate, too”. But, unfortunately, because of the long list above, it can be nearly impossible to know the exact factors determining their interest rate.
Discount points or “buying down” a rate
You can choose to pay discount points to buy down to a lower interest rate. To clarify, a “point” is equal to 1% of your loan amount. For example, if your loan amount is $354,000 then one discount point equals $3,540. This is included in your funds needed for closing in a purchase or funds taken from your proceeds in a cash-out refinance. It is also important to note that paying one point to buy down a rate doesn’t mean your rate will automatically be 1% lower.
What is your long-term intention for the property?
In a purchase or refinance transaction, it would be wise to consider your long-term intention for the property. For example, if you are purchasing your dream home with no plans to move ever, it might be wise to look at different loan options, and paying points might be worth it in the long run for the savings the lower rate will give you over time. If you are doing a cash-out refinance and plan to use the proceeds from your loan to fix up your home to sell, then it might not be cost-effective to use up your cash to buy down a rate for a mortgage that you do not plan on staying in for a long period of time.
Pay attention to discount points you might be charged
When comparing multiple offers, it is very important to pay attention to discount points that you might be charged without your knowledge to make a rate seem more appealing. You will want to be sure you are comparing apples to apples, not apples to oranges. We have seen this time and time again. In this market, it is easy to only focus on that rate and see nothing else. This is why comparing your current offers to what your neighbor or sister got is not a fair comparison.
A true Mortgage Professional will listen to you, consider your family’s long-term goals, and lay out several options for you to decide which works best. They will be able to show you the savings vs. the cost of buying down a rate and tell you exactly when you will recoup the cost in your amortization of the mortgage. If you would like to speak with one of our Senior Mortgage Professionals, please text or call 443-631-0215, and we would be happy to discuss your options and if it would be worth it to pay discount points.
