Want The Lowest Mortgage Rate Available? It Will Cost You

Posted by  on Jul 20, 2009

Everything You Need To Know About Points, Origination Fees, Buydowns, and Rebates

During the mortgage process, there are three major ways in which homeowners can effectively control the interest rate on their mortgages. Most commonly, your interest rate can be exactly what you qualify for, or "par" which means the rate you would get by paying nothing--if the lender absorbed all the costs and worked for free. So of course this loan does come with costs, and for many borrowers, this is a choice because it is also the simplest option of the three. You also have the option of paying more and getting a lower rate (this is called paying "discount" points) or accepting a higher rate and letting the lender use the extra profit to pay the costs of originating the mortgage. Take it high enough and you may be able to have your property taxes and insurance covered too.

Buying down the rate can be quite attractive if a seller offers to cover the costs of a buydown, because you get a lower rate and don't have to pay for it! In this case, after paying the set price, borrowers would have the lowest mortgage rateas it is less than what they originally qualified for. If you are footing the bill, however, consider that an interest rate above par would yield the exact opposite result--the bank lending the money could use the added profit of the higher rate to reduce the amount of out-of-pocket expenses needed to cover initial closing costs or commissions. According to NAMB, the National Association of Mortgage Brokers, 85% of borrowers choose this route. However, it is worth noting that the higher interest rate will typically cost the borrower more money if they keep the loan for many years.

As you can see, the "lowest" mortgage rate can actually vary depending on how you structure your mortgage. A mortgage broker will typically compare mortgage rates for you and lay out the options with the advantages, and disadvantages, of each. In general, if your time frame is short, you want to pay as little upfront and out-of-pocket as possible. A mortgage calculator can help you determine how long it takes for the amount saved upfront to be offset by a higher monthly payment. By understanding the way interest rates are determined, you will know exactly how much you are paying for your mortgage rate.



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