The lower the interest rate you pay on your mortgage, the
less expensive your monthly payments will be. And keeping your mortgage rate
low means you'll pay less total interest over the life of your loan. But while
interest rates are an important factor to look at when deciding whether or not
to accept a lender's offer, they're not the only thing to consider.
Don't ignore your closing costs
Getting a mortgage isn't free. Rather, you'll have to pay
closing costs to finalize your loan. These include things like origination fees,
appraisal fees, recording fees, and title searches.
Closings costs generally amount to 2% to 5% of your loan
amount. Clearly, that's a big range. They're also somewhat discretionary.
Lenders can't control some of the costs -- for example, the fee to record a
mortgage is generally established by local governments and is unavoidable. But
others are flexible and negotiable. So, if you're shopping around for a
mortgage with different lenders, it's important to compare not just interest
rates but also closing costs.
Imagine one lender charges you a lower interest rate than
another so you'd pay $20 less per month for your loan. That's a big difference.
After all, who wouldn't want to save $240 a year? But what if that same lender
with the lower rate also charges an extra $2,000 in closing costs? Suddenly,
you're not getting the savings you thought you were. You'd need to make
payments for 100 months to break even compared to the offer with no closing
costs.
Granted, when you sign a 30-mortgage, you sign up for 360
payments (assuming you don't pay off your home loan early). As such, in this
scenario, once you break even after 100 payments, you'd enjoy $20 of savings
over the course of 260 payments for a total of $5,200. But that also assumes
you don't move or refinance your mortgage during that time. So in this case,
you may be better off opting for the loan with the lower closing costs. A lot
can happen in the course of 100 months, and you may not even stay in your home
long enough to break even.
It pays to negotiate
If you receive an offer for a low interest rate on a
mortgage but higher closing costs than what a competing lender is asking for,
it never hurts to try to negotiate. If the first lender really wants your
business, it may agree to come down on closing costs, especially if you're a
strong mortgage candidate with great credit.
That said, some lenders are willing to match each other on
rates, so you could always do the opposite, too -- go back to a lender with
lower closing costs and ask it to drop its interest rate. There are plenty of
options to play around with, but the point is that closing costs should factor
into your decision to sign a mortgage just like rates should. Keep that in mind
as you submit those home loan applications.
A historic opportunity to potentially save thousands on
your mortgage
Chances are, interest rates won't stay put at multi-decade
lows for much longer. That's why taking action today is crucial, whether you're
wanting to refinance and cut your mortgage payment or you're ready to pull the
trigger on a new home purchase.
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