How Your Goals Affect Your Rate
When I talk with people about their past mortgages, often I hear “I was offered a single rate and chose whether or not to accept it. That is where the conversation stopped.” It’s shocking to me this is the basic strategy of the industry. People are provided a single quote with a “take it or leave it” ultimatum.
I’m here to show you that’s not the case. You have much more control over your rate options than many would lead you to believe. Having a basic understanding of available rates and their associated costs and credits will help you maximize your dollar while accomplishing your goals.
Here are a few key points that we’ll cover below:
*Available rates, there isn’t just one
*The costs and credits associated with rates
*How your goals dictate the rate you should select
*A reminder when it comes to long-term planning
As you can imagine, available rates change daily and often intraday. The mortgage market is just a piece of the greater capital markets that ebb and flow, repricing and reconfiguring to changes in policy, technology, and people as a whole. Although quite important, trying to time the rate lock perfectly shouldn’t be the priority when getting a new mortgage. Your goal should be to understand the relationship between your available funds, the proposed payment, costs, and how these options correlate to your specific goals with the home.
Let’s look at three hypothetical rate scenarios:
4.750% - $1565 payment - $2500 “cost” for the rate chosen
5.000% - $1610 payment - $0 cost/credit for the rate chosen (no lender charge)
5.250% - $1657 payment - $2500 “credit” for the rate chosen
Lower rate, higher cost
Unfortunately, the industry calls what is effectively the same thing by multiple names including buy down, discount, discount point, origination fee, etc. In short, you, the borrower, are using your money (today’s dollar) to obtain a lower rate. Although the lower rate reduces your payment and total finance charges over the term, one must determine if that is truly the best use of your money. Often widely advertised rates carry additional fees or costs for the borrower to obtain that rate. The question is, will you keep the loan long enough to benefit from a buy down?
Higher rate, lower cost
On the flip side of the spectrum, a lender can offer higher rates that yield a credit (or rebate) if the borrower accepts that rate. The credit applies to your total settlement charges which include lender fees and third-party fees. In simplest terms, the borrower is financing their closing costs by reducing their required cash to close. Would it be better for you to keep more of your cash liquid post-closing? Do you know you’ll carry the loan for a relatively short period?
Somewhere in the middle
In this spectrum of available rates, there is a middle ground in which the borrower obtains a rate that comes with no cost nor credit. Costs (or credits) increase and decrease causing advertised rates to move up and down. These pricing changes happen daily and sometimes within the day. One could imagine we’d have to see fairly steady moves up (or down) in pricing to bring new rates into the picture. Other times, geopolitical and monetary events may reset pricing completely, causing a relative shock to the system.
The relationship between rates and costs
Using the figures from the example above, you can see there is a $92/mo difference in payment comparing 4.75% to 5.25%. There is also a $5000 variance in the funds required to close the transaction – $2500 cost (your dollar used) vs. $2500 credit (your dollar retained).
Now that you understand there are multiple rate options and the relationship between costs and credits, you can apply the information to your unique scenario. We need to determine how long you foresee owning the home and retaining the particular loan you want to obtain.
Defining your goals, setting a plan, and looking forward
As we all know, hindsight is 20/20. In many aspects, it’s difficult to predict what life will be like in a few weeks or months, let alone years down the road. People change and the world changes around us. Our priorities are set, tested, and reset.
Even the best of planners would have a hard time defining a clear picture of what the payoff date may look like when obtaining a 30-year mortgage. With a shorter and shorter window, our accuracy in predicting our situation increases.
Let’s work together to create a plan for the short and long-term that helps you accomplish your goals of homeownership while maximizing your available funds today.