Monday, September 1, 2014

Mortgages: You Can't Just Shop Rate

A common conversation that I inevitably have with buyers begins with them telling me that they are either shopping lenders for the best rate or will be contacting a few different lenders to see where they can get the best rate.  

While low interest rates can be awfully inviting, your financial decisions have to be made on more than factors than just interest rate.  

Here are a few things to consider when searching for the best loan whether you are purchasing or just refinancing... 

1.  You cannot just shop interest rates-  When speaking with a lender make sure that you ask about all of the costs associated with a loan.  A small percentage difference looks enticing when you think about it over a 30 year term, but if that small percentage only saves you $50 a month, it takes a long time to make up for $2500 that you pay for higher closing costs (numbers are only an example, bottom line is to investigate all costs before making a decision).

2.  Have a plan for your stay-  How long will you plan on living in the home?  This is especially important for a refinance.  If it costs you $2000 to refinance your loan, but you'll only save $100 a month... make sure you are going to live in the home a minimum of 20 more months.  Otherwise, the refinance will cost you money in the long run.  

3.  Examine the loan terms-  One thing that often gets lost in the shuffle is the length of the loan.  If you are refinancing a loan that has 20 years left, a lower rate and a lower monthly payment may make sense in the short term.  However, if your loan is refinanced back into a 30 year term, you've just added 10 years of paying interest back into your situation.  The lower monthly payment helps your immediate cash flow, but it likely set you back in terms of paying down the principal.  A good exercise for this is to see use the new loan terms, but calculate how much you'd save if you paid it off in the time frame of the old loan (in this example, 20 years).

Best advice:  Find a lender you trust-  Mortgage are complicated, rely on the experts. Sit down and go through several scenarios with a lender that you trust to help you through the process.  Ask questions that help you see the entire picture, not just the interest rate.  You want to be able to afford the monthly payment, but not at the detriment of your long-term financial health.  

Take care, 
Scott Morrison

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