Understanding your mortgage
Pulling back the curtain on interest rates
Buying a home can be a game of numbers. How many bedrooms and baths? Three-car garage? Investing in a duplex? A common question asked at parties is, "What interest rate did you get on your house?" It's an easy figure to toss around, but it doesn't tell the full story – and every home buyer's story is different.
While it's important to understand interest rates, it's vital to consider the other aspects of your story as well. How long you might live in the house, how much money you have saved for a down payment and what your intentions are for remodeling are just a few factors in your decision. Find a mortgage lender who will not only ask these types of questions but will use your answers to find the loan that is right for you.
The rate is just one number
This hypothetical example clearly shows how seeking the lowest interest rate on a home loan may not be in your best interests. The buyer who wants the lower rate will need more money up front for settlement costs at closing. Also, the break-even point of 103 months means it will take nearly 9 years for the lower interest rate to be more beneficial to the buyer. A slightly higher interest rate in this situation increases the monthly payment by only $29.
No closing costs can add up
Some lenders appeal to buyers with ads promising no closing costs on a home loan, but they aren't revealing the full picture. Costs associated with the loan transaction will be collected, whether in a lump sum at closing or over the life of the loan in the form of a higher interest rate.
Just what are those costs? There are three basic categories:
- Origination fees charged by the lender.
- Third-party fees for things such as appraisals, property title and credit report.
- Government fees for taxes, recording charges and more, which vary by state.
Your lender will provide a good-faith estimate that includes every potential fee you may expect to pay.
When to lock in the rate
A rate lock is a lender's guarantee to a prospective home buyer on a certain interest rate and price for a specific period of time, usually 30, 45 or 60 days. Once you lock in an interest rate, it will not change, no matter what fluctuations occur in the marketplace.
Home buyers may notice that interest rates fluctuate a lot. Lock in too soon, and your loan may not be finalized before the guarantee expires. Lock in too late, and you may miss out on a lower interest rate.
Just when is the right time to lock in the rate? There are several considerations, but perhaps the most important thing is that you work with a mortgage loan officer who will help you decide based on your own unique situation.
When choosing a lender, be sure to find one who shares your values and will help you see behind the curtain, not just sell you the lowest rate or lowest closing costs.
1 Hypothetical example not based on creditworthiness or normal underwriting standards. Calculations are from Thrivent Federal Credit Union's internal software and may vary on other software.