You want the lowest interest rate on your mortgage. You aren’t alone. But, it’s a big mistake to choose a lender based on the rate alone. You must consider numerous other factors. If you don’t, you could end up making the wrong choice for your mortgage.
The Term Could Affect you More Than the Interest Rate
Looking at interest rates alone, 30-year rates are usually higher. Does this mean you should take the 15-year term just for the lower rate? It depends on your circumstances.
Some people can handle a 15-year payment. This means you pay much more principal each month than you would on a 30-year. You have half of the time to pay the loan off. But, if that higher payment will put you in financial despair, it’s not worth it.
This is why focusing on the term you can afford is crucial. The rate is an integral part, but not one to focus on initially. Once you decide on the right term, then you can shop the rate. Comparing 30-year terms with 3 or 4 lenders will give you the best idea of the right loan for you.
The Type of Loan Affects you More Than the Interest Rate
Another important factor is the type of loan. If one lender offers you an ARM for a much lower rate, you might jump at it. But should you? Not until you figure out your exact circumstances.
An ARM, or adjustable rate mortgage, is fixed for a short period. After that, it may adjust once a year or more, depending on the terms. While that initial rate seemed great at the onset, it can get much higher real fast. If it makes it harder for you to afford the loan, it might not be right for you.
The fixed rate loan usually starts with a higher rate than the ARM. But it’s fixed – it never changes. If you need predictability this is the loan for you. No matter that the rate is slightly higher. The lack of stress you will feel is worth its weight in gold.
Borrowers that usually entertain the ARM loan are those who know they will move soon. If they buy a home with a 5-year term knowing they will move in 4 years, they don’t have to worry about the adjustments. They also get to take advantage of the lower interest rate. It’s a win-win, but only for borrowers in a short-term situation.
The APR Reflects the True Cost of the Loan
Many borrowers make the mistake of looking only at the interest rate. They forget about the APR. This is a true reflection of the cost of the loan. The interest is what you pay monthly. The APR is a reflection of what it cost to borrow the money over the life of the loan.
You might think a lender that offers a 4% interest rate is better than one that offers a 5% rate. But, it depends on the fees. Is the lender offering 4% charging several points and other closing fees? Maybe the lender charging 5% doesn’t charge any points and only charges standard fees.
You can only compare the two lenders after you look closely at the APR.
The Fees Should Affect How You Choose a Lender
When you choose a lender, fees should play a role. How much do you want to pay for the loan? Are the fees buying down the rate or are they fees everyone pays? These should help you find the right lender.
Generally, the longer you plan to stay in the home, the more sense it makes to pay fees if they lower your rate. If you are in the home for the short-term, though, paying the higher interest rate may make more sense. You won’t know until you compare the fees, though. Every lender has their own fees. There aren’t strict requirements across the board.
It’s up to you to shop around and compare the various fees to see which is right for you.
As you can see, there are many factors at play when choosing a lender. Looking at the big picture will give you an idea of what you can afford. Focusing only on the interest rate could end up costing you a lot more in the end.
Ask specific questions of each lender. Find out what fees they charge and which fees are negotiable. Ask how changing the interest rate might change your fees. Then you can determine which loan will work best for your situation.