You may not believe me but in many cases a higher rate can save you cash out of pocket on your mortgage.
What did he say? Is he Crazy??
Yes, maybe, after all I am in this business but that doesn’t have anything to do with the facts I’m presenting here.
Lender Credit Explained – For most types of loans you can move up and down the scale of rates. So, even if you’re getting a 30 yr fixed $300k conventional loan the rate can very quite a bit with the same lender. In simple terms you can either pay more in closing costs for a lower rate or pay less (or maybe nothing at all) in closing costs for a higher rate.
Why would you do either? Good question. A higher interest rate with more of a rebate is more beneficial in the short term. A lower interest rate is more beneficial in the long term.
$300,000 loan amount
If you chose a 3.75% rate with 0 points ( no increase or credit towards closing costs). The P&I payment is $1389/mo.
If you chose a 4.25% rate you get a rebate of 3 points. The P&I payment is $1476/mo.
Okay you said a higher rate = paying less , but the monthly payment is higher?
Stay with me here. Yes, you will still benefit if you sell or refinance before the “break even” point.
When do you “break even” ? Or in other-words , when do you benefit from choosing the 3.75% or the 4.25%?
Your rebate is 3 points or 3% of $300,000 = $9,000
The difference in payment is $87 / mo
$9000/$87 per month = about 103 months or 8.6 years is the “break even” point
So, if you sell or refinance within that 8.6 years you’ve paid less if you went with the 4.25% vs. the 3.75%! You got a higher rate and paid less!
***** Keep in mind this is simply a “cash out of pocket” calculation and doesn’t take into account the amount paid down on the loan principle, any tax benefits there may be to going with the higher rate (ask your CPA), or any interest made on that $9000 you kept. Simply put, a lot of people own homes for a short term (or refinance) and pay closing costs out of pocket.. Yes, there are some who will own a home forever and in that case this is not a good strategy.
Crazy isn’t it?? Why didn’t anyone tell us this before??
Most loan officers won’t quote you the higher rate because they are afraid someone else will quote you lower and they will lose the business. I’ve seen consumers so fixated on the rate, they make a decision that’s actually going to cost more!
That’s the whole reason I wrote this. I would like to help people to make better decisions about the mortgages they are getting. It’s not a one-size fits all, but it is something everyone getting a mortgage should be aware of.