Why Finding The Lowest Interest Rate For A Mortgage Loan Is Not Always In Your Favor [mortgageinsuranceguide.blogspot.com]
Interest rates on mortgage loans are at record lows. So why are so few people taking advantage of them? In a functional market, borrowers take advantage of low rates by borrowing more. Yet that's not what's happening. Let's take a closer look at some ... Why Aren't More People Refinancing Their Mortgages?
Many people often fall into the temptation of searching for a mortgage loan that has the lowest interest rate but often times this is a huge mistake.
While the interest rate is important, it should never be the deciding factor as there are other costs involved. Just like how you would do research before buying a car, the same also applies for home mortgage loans.
Factor in all the costs for a loan
When people think about mortgage loans, the first thing they often think of is finding one that has the lowest interest rate. And this makes sense too but companies that offer lower interest rates may have terms and conditions that are not exactly favorable.
While a deal may look attractive, you need to consider all the costs that are involved before signing a deal.
The last thing you would want is to sign a 1.5% interest rate loan thinking it is a great deal only to find that the terms would leave you owing more than you borrowed. Besides looking at the interest rates, there are also points and origination fees which are upfront charges.
This amount is typically a percentage of the loan amount and often depends on your financial circumstances.
Get APR quotes from different lenders
Then you also need to consider additional fees as well that are needed to secure the loan like the underwriting and processing fees. When searching for a mortgage loan it is essential that you look at the overall costs instead of just focusing on the interest rate.
You can find a low rate but what good would it be if it means paying a high upfront cost and having high monthly payments?
When deciding which lender to choose, the best way is to look at the Annual Percentage Rate, or APR, as this a better representation of the true interest rate. When it comes to shopping for a home, there is much to consider besides the interest rate.
The type of home you buy will ultimately depend on what you can afford to spend and what your financial situation is like.
Related Why Finding The Lowest Interest Rate For A Mortgage Loan Is Not Always In Your Favor Issues
Question by Esq: Why are mortgage loan interest rates higher for fixed rate mortgages held for longer periods of time? I am sorry if this sounds like a dumb question, but I don't understand. For example, why are 30 year fixed mortgage rates the highest mortgage rates, vs say a 15, and why are 15 year fixed rate mortgages higher than adjustable rate mortgages ? It seems that lending institutions are taking greater risk with a ARM vs. a Fixed rate mortage and they should pay a higher rate (For example, compared this situation to a new car loan vs a used car loan--the risk is higher on a used car loan ?? ?? I can understand a fixed rate loan of 30 higher than a 15 --greater risk of default from the borrower, BUT I still don't get the ARM being so low. Best answer for Why are mortgage loan interest rates higher for fixed rate mortgages held for longer periods of time?:
Answer by Leo F
30 years takes longer to get your investment back (less on the front and more on the back of the loan). Adjustable rate the lender is hoping for the rate to be higher when it adjusts or it is set for a given time to adjust up no matter what the rate is. On a 15 year the default is lower due to being 1/2 the time.
Answer by efflandt
The reason a 30 may be more interest than a 15 yr is because there is more risk that interest rates could increase during that time and the bank could be losing money at that rate vs. making a subsequent loan at higher interest. The reason that variable rates are lower is because they could follow any increasing interest rates up. I forget what the variable rate was on the free HELOC my lender gave me during a refi in 2005, but that interest rate had gone as high as 7.5% between then and the 3.75% it is now. But I also remember a time when normal mortgage interest rates were double digits, high enou gh that a bank offered me a discount if I paid off a 10% land contract early.
Answer by something stinks
The lender is taking basis risk on longer term loans since no one knows where rates will be in 15 or 30 years. The bank looks at the yield curve and prices the loan based off of a spread for 15 and 30 year product. ARMs are cheapest because they recast earlier and there isn't as much interest rate risk in the short term.
