I Want the LOWEST Mortgage Rate!
Me Too! As a Mortgage Professional giving people what they want would seem to be the easy sale. Wait… don’t we have record foreclosures because Lenders gave borrowers what they wanted? Rates and payments that seemed too good to be true “1.75% fixed Payment Loans” and you could “choose you payment option each month” and do it with “NO Money Down” and “No proof of income” to make it really simple. To be fair it’s like the gun dispute “guns don’t kill people, people kill people”. Let’s assume it was not a bad mortgage product, it was just sold to 99.7% of the wrong borrowers!
The lowest rate on a poorly constructed financing package is a bad deal! With recent changes in how loans are priced and disclosed it is more important than ever for a consumer to understand some mortgage basics.
You have done your homework and decided that a 30 yr fixed is your best option and you want to purchase with 10% down needing a loan of $200,000. Seems easy enough, the only thing left is to get the lowest rate, or is it? Let’s break down your payment or PITI (Principle, Interest, Taxes, Insurance) Insurance, what insurance? Homeowners, Fire, Hazard which are really just different names for the policy that covers your house. Additionally with 10% down you will need Mortgage Insurance. Mortgage Insurance protects the lender if you default so do not confuse this with insurance that pays your mortgage if you are disabled or pays it off if you are deceased. First lets look at the P&I associated with rate on $200,000.
Which rate is better? 4.75% P&I $1043.29 or 4.875% P&I $1,058.41. The 4.75% rate saves us $15.12 per month and times 360 payments saves $5,443.20.
What is the YSP or Discount Points? YSP is the Yield Spread Premium that either the bank keeps or the lender may credit it to you. Discount points you would pay to reduce your interest rate. Lets assume the difference between 4.75% and 4.875% is 1 percent or 1 point and would equal $2,000. Which is the better rate now? Would you trade $2,000 for $5443.20? Could you use an Extra $2,000 to lower your closing cost?
Mortgage Insurance Options? You do know you have options. Lets assume a 760 credit score you could choose monthly MI or .62 ($103.33) or Single 1 time at 1.25 ($2,500) that you can pay 1 time upfront or may be able to finance into your loan. ($202,500). Take a look at your payments adjusted with the MI insurance
- 4.75% $1,146.62
- 4.875% $1,161.74 ($2,000 YSP Credit)
- SINGLE (cost $2,500)
- 4.75% $1,043.29
- 4.875% $1,058.41 ($2,000 YSP Credit or cost $500)
- 4.75% $1,056.33
- 4.875% $1,071.64 ($2,000 YSP Credit)
If we now compare 4.75% monthly MI against 4.875% Financed MI we have a monthly savings of $74.98 and we saved $2,000 on your Closing Cost. Let me say this a different way… You would need a rate of 4.00% with monthly MI to match the payment of the 4.75% financed MI…
You also have the option for an 30 yr fixed 80/10/10 loan to avoid PMI…
Rate saved $15 per month and product saved $90 per month and we just compared 1 option… I agree that rate is important but the lowest rate will not make up for the wrong financing package! When shopping for a mortgage ask about rate but also ask about options and alternate programs!
For more info on these topics: YSP, MI Programs and Split Loans checkout the NORSTAR UNIVERSITY
By Bill Frantz