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Understanding Home Mortgages and Rates of Interest

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The process of purchasing a home can be both exciting and stressful. For a potential homebuyer, there are so many factors to consider that it can feel overwhelming. With so many big considerations, small but essential details can be overlooked, like the choice to buy-down the interest rate on a home mortgage loan. Homebuyers often choose an interest rate without considering whether it best aligns with their long-term financial goals.

To make an informed decision, it’s essential to understand the definition of a buy-down fee and a lender credit. A buy-down fee is a one-time payment that allows homebuyers to purchase at a lower interest rate, while a lender credit is provided for selecting a higher interest rate.


Determining Best Home Mortgage Interest Rates

Let’s say Sarah is purchasing a home for $750,000 and intends to make a down payment of 20%. She plans to use a 30-year fixed conventional loan to finance the purchase. Sarah intends to stay in this home for the foreseeable future and make it her “forever home”. Her lender provides her with three different interest rate options, and Sarah locks in the higher interest rate, which provides her with a credit towards her closing costs.

The three interest rate options are as follows:

  • 3.25% interest rate that charges a buy-down fee of $2,500, and has a monthly principal and interest payment of $2,611.24.
  • 3.375% interest rate that doesn’t charge any buy-down fees and doesn’t pay any lender credits, with a monthly principal and interest payment of $2,652.58.
  • 3.50% interest rate that pays a lender credit of $1,200 and has a monthly principal and interest payment of $2,694.27.

While there is no definitive answer to whether Sarah made the right choice, considering the following factors could have benefitted her long-term financial goals and decreased her debt burden.

While there is no right or wrong answer to the question posed above, here are some factors that may have benefited Sarah’s long-term financial goals and  had she taken the time to consider her options.

Sarah’s plan to stay in the home for a prolonged period suggests that she will likely pay off the loan during its 30-year amortization period. Choosing the 3.25% option instead of the 3.50% option could have saved Sarah nearly $30,000 over the life of the loan. Similarly, selecting the 3.375% option instead of the 3.50% option could have saved her just over $15,000 over the loan’s life.

Sarah may have been satisfied with the interest rate she chose to lock, but this example demonstrates how seemingly small details can have a significant impact on long-term financial goals. Consulting a qualified advisor can assist in identifying new options for individual situations, including recasting and retirement or disability benefits.

Are you currently in the market for a mortgage or refinance? The Alpine Bank mortgage division can provide expert guidance.

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