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I just wanted to discuss today the all important topic on "Mortgage Rates".  Unfortunately you can't turn on a T.V., read the newspaper, or search the internet without viewing the ever popular "mortgage rates at an all time low".  Additionally how many times have you gone to a party lately and you overheard someone say "I just landed a 4.5% rate on my mortgage".  It appears they are wearing their rate as some sort of badge of honor.  I knew of someone who actually brought his mortgage note to work to show everybody what rate he received.

I know the neurons in the minds of everyone who is reading this is firing at all cylinders and are dying to ask "Why are you against low rates?"  Let me clarify.  I am not against low rates  I think we need to break down the important elements of determining what loan products are best for clients individual needs. As a client borrows money from a bank to purchase a home, the bank offers the client a variety of options on how to pay back that money.  Although the rate is a determining element of that transaction, there are many other elements that should be considered on choosing the right loan product.

Other factors include:

1. How long are you going to be in the loan?

2. The term of the loan, 15, 20, or 30 years.

3. The advantages of Arms vs Fixed rates.

4. Should you buy points?

For example, let's say Joe Smith wants to borrow $250,000 to purchase a home.  It's Joe's first home.  When we sit down to assist him in deciding what mortgage product would suit his needs best, we asked him to map out what the next five years might look like for Joe.  Joe stated that he and his wife are going to start a family in the next two to three years and he is in line for a promotion at work.  Therefore, he feels that he most likely will reside in the home for the next three to five years.  Afterward he plans on selling the home to purchase a larger home for his growing family.

In light of the previous facts, Joe has a multitude of lending options for him.  He could take a standard 30-year fixed rate.  For this example, let's say the 30 year fixed rate is at 5%.  This is a standard conventional rate with no points.  It is a safe loan and Joe realizes his payments will never change. 

Another option for Joe is he could buy the rate down with the use of points.  A point is equal to one percent of the loan.  For this scenario, let's say Joe has the option to buy the rate down to 4.75% with two points.  Is this option better then the fixed rate?  If he is planning on selling his home in three to five years, let's find out if this is a beneficial way to proceed. 

At a 5% standard fixed rate on a $250,000 loan, his principle and interest payment will be $1342.05.  If Joe were to but it down to 4.75%, Joe would have to purchase 2 points which equals $5,000.  When he buys down the rate to 4.75% the principle and interest payment would be $1304.12.  By buying down the rate, Joe saves $37.92 per month.  Therefore if Joe buys pays $5,000 to save $37.92 per month, it would take Joe 11 years to recoup his $5,000.  ($5,000/37.92 = 131.86 months).  Because Joe is planning to sell the house in three to five years, Joe would be better off to take the standard rate of 5% with no points. 

But Joe has another option.  Joe could explore a five year adjustable rate mortgage at 4.75% with no points.  This allows for a fixed rate of 4.75% the first five years, but then adjusts every year after the initial fixed period.  Although this is a riskier loan then the thirty year fixed, it provides Joe some flexibility in lowering his initial payments if he is fairly confident that he will sell the home within the next five years.

So you see rate is not the ultimate determinate in choosing a mortgage.  What ultimately is most important is sitting down with a loan specialist who will ask the probing questions regarding your finances, future plans, and what ultimately is best for you.  You have to work with a lender, who knows what questions to ask, is educated on the different types of loan products, and who will take the time to sit down with you to assist you in determining the best type of mortgage that fits your individual needs.