Coming to Terms

Coming to Terms

Homebuyers, especially first time homebuyers, might at first be a bit overwhelmed at the amount of choices that must be made when deciding on how to finance the purchase. Once the loan program has been selected, the next is going to be the interest rate. Lenders offer several different rates for the same loan program. A 30 year fixed can have six or seven choices, depending upon how many discount points, or lack thereof, are required. Paying discount points lowers a rate while paying no points results in a slightly higher rate. It’s a small cost-benefit analysis that you and your loan officer will work through. Ultimately though, it’s your choice. Your loan officer won’t choose for you.

You’ll also need to decide when to lock in a rate and for how long. Rates can change on a daily basis and even though a lender is quoting a particular rate online, through an email or phone call, that same rate for the same cost might not be the same the following day. It’s up to you to decide when you want to guarantee that rate with an interest rate lock.

Your lender can provide you with its rate lock policy but just like choosing which rate is best for you, you also need to know how long you want that rate locked. If you’re closing in 30 days, you might want to lock the rate for 30 days. That way if rates go up, you’re protected. The longer the rate lock, the more it’s going to cost. Not a lot, but a little. You might be able to lock in a rate for as little as 10 days. You may also lock in a rate for 60 or 90 days, but again it will be a bit more expensive for long term locks.

And speaking of terms, you’ll also need to decide the term of your loan. Most loans today or spread out, or amortized, over a 30 year period. Some even as long as 40 years but those programs are somewhat scarce. Because the loan is stretched out over 30 years the payments will be lower compared to a shorter term loan. And because it’s paid out over 30 years there is more long term interest paid to the lender. More interest paid over the life of the loan, but lower monthly payments is the tradeoff.

The second most popular mortgage term is 15 years. In fact, when you peruse many mortgage sites that advertise rates, you might see rates for both a 30 and 15 year term. A 15 year term will have less interest paid over the life of the loan because it’s paid off sooner. For example, with a $200,000 loan amortized over 30 years at 4.25 percent, the principal and interest payment is $983. With a 15 year term using the very same rate the payment is $1,504. The total interest paid over a 30 year period is $354,196 but with a 15 year term the amount of interest paid $270,820.

But there are still more choices. Sometimes borrowers take out a 30 year instead of a 15 year because the monthly payments are much lower. Even though there is more long term interest paid, the 30 year term is more affordable. However, someone might want a term somewhere in between. There are also 20 and 25 year terms, it’s just that you rarely see them advertised. There is also a shorter 10 year term.

Once you’ve decided on your loan program, loan term and rate, you’re pretty much good to go.






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