There’s no denying it, home mortgage interest rates are going up, and will likely continue to increase over the next several years. This trend is actually just a natural upswing to the economic cycle, but it’s got prospective home owners in a bit of a panic. Should they abandon plans to buy a home, get stuck with a high interest rate, or hope for things to turn around in the future?
While interest rates are higher than they were a couple of years ago, there’s no reason to panic. Even if interest rates do increase, there are always a number of resources for home buyers.
One of the easiest answers is to pay discount fees to get a lower interest rate. Many lenders will offer home buyers a lower interest rate if the buyer is willing to pay points for a lower rate. What exactly is a point? A point is one percent of the total loan amount.
When you pay points for a discounted interest rate, you pay to lower the interest rate over the life of the loan. However, you must pay the discount fee as part of your closing costs of the loan. This means more out of pocket expense at the start of the loan, but a lower monthly payment for the life of the loan.
It sounds expensive, paying money up front to get a lower interest rate. But, simply add up your monthly savings for the discounted rate and you’ll find that you can recoup the initial extra fee in a just a few years. You’ll also save considerably over the life of the loan.
As an example, on a $100,000 mortgage (30-year fixed): a 7 percent, the monthly payment is $665.30 and the total interest paid over the life of the loan is $139,508.99. Compare this to the same loan at 8 percent: a monthly payment of $733.76 and a total interest payment of $164,155.25. Beyond the monthly savings, you’ll save almost $25,000 over the life of the loan.
Paying a fee for a lower interest rate makes sense if you are planning to stay in the home for a few years. In a few years, you’ll more than make back the original investment at closing in monthly savings. If you plan to sell the house in a couple of years, it may not be worth the up-front investment.
When you work with a trustworthy mortgage officer, you can find lots of options for making a monthly mortgage payment affordable, including paying a discount fee for a lower interest rate, as well as a number of other options. Call your mortgage broker to find out the best way to save money each month with an affordable home loan.
Click here to get a free copy of Jeff Nelson’s, “7 Common Home Buying Mistakes,” a 10-page report that describes the mistakes to avoid when purchasing your new home in El Centro, California.