Interest rates have always been a hot topic of conversation, but, with the recent record lows we’ve hit, we wanted to provide a little more food for thought. Being that we are busy being the best in our field, we thought we’d leave that to someone who knows more on the nitty gritty of it all. We asked Jeffrey Majer of Dominion Capital Mortgage what he thought would be the best advice he could offer to prospective buyers when considering rates & loan terms.
It is very rare that anyone ever brags about how low their closing costs were. But rate… that is a different story. I have heard people talk about their interest rate with the most exalted pride. I almost expect to see a sticker on the back of their minivan reading “your kid made the honor roll, but my interest rate is 3%”. But that super low rate is often costing them in ways they don’t talk about or in many occasions don’t even know about it. Is it worth it to buy that rate down? Or is the rate even the gauge of a good loan? Well it depends on a few factors.
First, how long is the person going to own that home, or more importantly, own that loan? According to the National Association of Realtors, in 2017 the average seller had only been in their home for 9 years. Over that 9 years they may have also refinanced, negating that initial rate.
The value of a buy down can be easily figured out by dividing the buy down amount by the number of months they plan to stay in the home. If the answer is more than monthly savings from the lower rate, it’s not worth it.
Of course, most upfront fees can be covered by seller concessions, but it doesn’t take a math wiz to know, the more concessions being asked for, the worse the offer looks to the seller.
The other thing is the program. For example, an FHA loan is going to have a lower interest rate but can have mortgage insurance for life and up-front mortgage insurance which is more than likely financed into the loan. It is a great loan for the right person but comparing the FHA interest rate to a VA interest rate is like comparing apples and rocks.
The most important thing is can the buyer afford the payment and does it allow them to buy the most house for their money. All of that being said, many buyers are still going to be enticed by a low rate and look away from how much it costs upfront or look away from a program that lets them buy more because the rate sounds higher. It takes a good Mortgage Loan Officer to explain these things to the borrower and make sure they get the best deal possible, while being able to afford as much as possible for each situation. They are all different.
Jeffrey Edward Majer
Dominion Capital Mortgage, Inc