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Deciding on a Rate
The obvious answer to this one is: "The lowest one!". Unfortunately, the obvious answer may not be the correct answer in your case. The interest rate system is far too complicated to base it on a simple answer that might, at first, be very appealing.
If you made your decisions related to the loan program in Step 1, decided on fixed or ARM and on the mortgage length, then you have reduced your options in Step 2. Choosing a rate largely applies to fixed mortgage rates and is really a discussion and consideration of points vs. rates.
If you have chosen an ARM and decided on the terms of that loan, i.e., 1-year, 3-year, 5-year, etc, then you can skip this step and jump ahead to Step #3. However, if you have decided on a fixed-rate mortgage, then you will notice that the rate gets lower depending on the number of points you are willing to pay.
In essence, when you pay points, you are paying interest on your mortgage in advance. See our detailed discussion about Points Vs Rates to understand how they relate to each other. Generally speaking, if you have the available funds up front and plan on staying in your home for a minimum of 7-years, it is cheaper to pay the points than the higher rate. The more points you can afford to pay at closing will be a direct reflection on the amount of money you will save in the future. However, if you don't plan on keeping your property for at least 7-years (or think maybe you'll refinance it before then), then it doesn't pay to pay points. This is explained in more detail on our "points" page.
A few other terms that you should be familiar with and that will crop up during the application process include:
- Points - fees paid up front and used to lower the interest rate, i.e., pre-payment of interest. Each point is valued at 1%, so each point on a $100,000 loan equals $1,000.00.
- Annual Percentage Rate (APR) - a complicated calculation that takes into account the fees paid to get the loan in addition to the interest rate. It is an excellent way to compare different loans and loan programs.
If you have any questions related to Step #2 or any other aspect of the loan process, please contact us. Our loan consultants are here to answer your questions, whether they be general, specific, or because your confused. Because at Sue Baxter that's what we do best: we add a personal touch to the impersonal electronic age.
Continue on to Step #3
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