Do low Mortgage rates entice you to buy a new house or refinance an existing mortgage? Here is what you need to know.
Don’t forget mortgage involves costs
Mortgage process – whether you are refinancing an existing mortgage, or obtaining a brand new mortgage – comes with a cost. The cost is part financial and part non-financial.
And you must take this cost into consideration even before you initiate the process.
The financial part – Perhaps your mortgage broker or your financial advisor may be able to help you assess.
For example, it is often estimated that mortgage closing costs generally fall between 3-5% of the price of the home. So, if you are purchasing a house worth $500,000 – you may estimate closing costs fall anywhere between $15,000 to $25,000.
And your broker may assess the actual cost with more accuracy for your unique situation.
But, what about the non-financial part? By non-financial cost, I mean the cost of the time you put into the process itself.
In other words, how do you account for the cost of you researching the mortgage rates – You don’t do this normally – you are busy with your day job
the time you spend choosing the right mortgage broker, submitting all the required paperwork, and going through the entire closing process?
This could take several hours of your time…
It is hard to estimate a cost for this, but one thing is sure – the busier you are, the more is your time cost.
For example, the time cost may be much higher for a couple in their forties – with 2 careers, 2 young children – than for a couple who are empty nesters.
So, understanding the costs – is in fact – the first step when you are thinking of a new mortgage
Don’t commit for a higher monthly payment than you can afford
If you are looking at fixed-rate mortgages, the interest rate on a 30-year fixed is, generally, higher than the interest rate for a 15-year fixed.
So, you may be tempted to consider a 15-year fixed in order to get the lower rate.
Well, not so fast.
While the interest rates are lower for a 30-year fixed, the monthly payments could be significantly higher than the 15-year fixed.
Because the payments are spread over a longer-term in case of the 30-year loan.
For example, let’s say you are considering a loan of $500,000. And your broker gives you an interest rate quote of 3% for 15-year fixed and he or she gives you a 3.75% for a 30-year fixed.
Your monthly payment for the 15-year fixed is approximately $3,452 while your monthly payment for the 30-year fixed is approximately $2,315.
A difference of a little more than $1,100 in your monthly payments – for this situation.
So, the question to ask yourself is – Can I afford a higher monthly payment in order to get a lower interest rate?
If you believe you can, consider a 15-year fixed at lower rates. If not, stick with the 30-year. But, do not commit for a 15-year fixed mortgage – simply because the interest rate is low.
Don’t rule out Adjustable Rate Mortgage (a.k.a. ARM)?
Adjustable Rate Mortgages are generally offered at very competitive rates compared to their fixed counterparts.
So, what is the catch?
They are adjustable – meaning the initial low-rate is fixed for a term and after the term, adjusts for the then prevailing rates.
So, are they bad? Maybe not depending on your situation.
If you believe – you are likely to pay off the loan in less than 7 years,
if you believe – you are likely to refinance the loan in less than 7 years,
if you believe – you are likely to sell the house in less than 7 years
You are a great candidate to lock in the low rates of Adjustable Rate Mortgages and not worry about the caveats they provide.
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