Mortgage Myth 5: The Lowest Interest Rate Is the Best Option
Should you always go for the lowest interest rate?
Surprisingly, not necessarily.
Nick Zwiebel and John Major elaborate on this topic in the fifth installment of Aksarben Mortgage’s Mortgage Myth-busting series.
“The lowest interest rate is not always the best option.” TRUE!
It’s wiser to consider OVERALL COST.
At first glance, securing the lowest possible interest rate seems fiscally prudent. But sometimes low-interest rates carry additional expenses. The result? You end up paying a few extra $1,000 in order to “save” on your interest rate.
Examples of expenses that can offset interest rate savings are:
Discount points. These are fees you, the borrower, pay to reduce the interest rate. 1 point equals 1% of the loan amount and can reduce the mortgage rate by 0.25%. However, the upfront cost of these points can run $1,000-plus and can take between 7-9 years, eating away at any savings realized by a lower interest rate.
Adjustable-Rate Mortgage (ARM). An adjustable-rate mortgage locks in at a low fixed rate anywhere from 3-10 years and then adjusts annually to current (read: fluctuating) mortgage rates. If you have debt, such as student loan debt, that you know you’ll pay off by the time your mortgage shifts to a variable rate or you know you will be out of the house at this time, ARM might be an option.
Mortgages are not a “One Size Fits All” proposition.
Home loans vary, sometimes greatly, and mortgages are custom products, tailored to fit your individual needs and financial situation.
You don’t pay interest rate; you pay payment.
Bottom line: A mortgage rate difference of 1% point can potentially lower your monthly payment by 10% or more. When considering interest rate options, look at ALL the costs that factor into your monthly mortgage payment. The lowest interest rate could be the path to the lowest mortgage payment. Or, a higher interest rate could free you from monthly private mortgage insurance (PMI), resulting in a lower overall payment.
It’s a trade-off that your mortgage advisor at Aksarben Mortgage can help you weigh. Remember that you don’t pay interest rate; you pay payment!
Our user-friendly calculator puts you in charge of estimating your mortgage payment.