Mortgage Rates Vs Closing Cost – Understanding How Interest Rates And Closing Cost Work

A mortgage loan is one of the biggest financial decisions you will make during your lifetime and it is important to make sure that you know the terms of your home loan.

One of the most important parts of your home loan is your loan interest rate. Several home owners believe that the lowest interest rate is the most important part of a loan, but this is not always true. Interest rates and the associated closing cost play an important roll in the home loan and both effect each other.

Home loans with the reduced interest rates will have the highest closing cost, but when closing cost reduced, the interest rate will rise. It is like a see-saw, when one side goes up, the other side goes down. This is because in order to lower your mortgage rate you have to purchase a discount point. Discount points lower your interest rate usually by .125%-.25%.

If you take a higher home loan rate, you will get a premium or a credit of cost that can be applied to the closing cost. By taking a higher rate, the closing cost will be lower.

When searching for a mortgage, it is important to find the balance between closing cost and interest rates. Here are some important questions you need to ask when determining the interest rate for your home loan:

* How long will I keep the home loan or the home that I am buying?

* What is my breakeven mark for buying down my interest rate?

* How much money I will save over the lifetime of the home loan?

These are important questions because not all buyers are in the same situation. If you plan on keeping your loan for a short time frame (2-5 years) it might be a better option to take a higher rate and reduce closing cost, but if you plan on keeping the mortgage for an extended amount of time, buying down the interest rate might be the best option.

Also, when purchasing a house, if the seller is paying for some of your closing cost, you can use the seller credit to help reduce your interest rate by buying a discount point or just decrease the total amount of closing cost. Ultimately, the decision to buy down a lower rate should be based on how long you plan on keeping the loan.

Discuss all your options with your mortgage adviser today to see what option is best for you!