Buying a home is a big financial commitment. If you are a new homebuyer, the process can be overwhelming. Taking your time to consider the following questions will help you to understand how to get a low mortgage rate on your new home.
Should I Go With A Fixed Or An Adjustable Mortgage Rate?
When you take out a mortgage the lender will give you two options for financing the amount. These include a fixed rate and an adjustable mortgage rate.
A fixed rate mortgage is when your monthly payments are locked into a set amount. Your payment rate will never change over the life of the loan. A set percentage of each payment is put towards the principal, while the remaining is put towards the interest owed. It’s important to note that insurance and property taxes may fluctuate, as they are separate from the mortgage loan.
Adjustable Mortgage Rate (AMR)
An AMR is when your monthly mortgage payment fluctuates throughout the life of the loan. Your rate can go up or down depending on the specific interest rate index that your bank chooses to go by. AMRs have gained in popularity among new homeowners because many offer low introductory rates for the few months up to the first year of the mortgage.
It’s important to consider the pros and cons of each of these two options. While a lower introductory rate with an AMR may sound appealing, especially at the time of purchase when you have so many other costs, your mortgage payments can go up. It’s a good idea to see how much a rate increase would affect your payment to get an idea of how much your budget can handle.
Should I Pay For Points?
Mortgage points are offered to a new homebuyer at the time of the mortgage closing. These points are a way to reduce the interest rate offered by the lender. Each mortgage point is equal to one percent of the total amount of the loan.
For example, let’s assume you were offered a mortgage loan of $100,000 at an interest rate of 4 percent. At the time of closing your mortgage lender tells you a point will be worth .25 percent of your interest rate. If you decide to pay for one point, you would owe the lender $1,000 upfront, which is 1 percent of the $100,000 mortgage amount. The interest rate for your mortgage would drop by .25 percent, making your new interest rate for the term of the loan 3.75 percent.
The major factor to consider when deciding to buy points is the length of time you intend on staying in your home. If you know that you will be selling your home in a few short years, then paying this extra money up front isn’t worth it to your finances. However, if you plan on staying in your home for a long period of time, then the decrease in interest rate is a good idea.
These are two very important questions you need to ask when looking to get a lower mortgage rate. By being knowledgeable about these opportunities you can make an informed decision that will benefit your financial future.