The Lowest Interest Rate Does Not Always Produce The Lowest Monthly Payment

Reblogger
Real Estate Agent with Keller Williams NY Realty

This is great information for consumers who say they want a bank that will provide "the lowest interest rate". I always tell buyers to compare three different mortgage firms and to look at their "total" costs, not just the interest rate.

Original content by George Souto NMLS #65149

As low as interest rates are today, Borrowers are still focused on shopping for the lowest interest rate possible.  That is because Borrowers think that the lowest interest rate produces the lowest monthly payment.  If you think that opinion is correct, then you need to think again, because it is only correct if the Mortgage Programs are the same.  But if the Mortgage Programs are not the same then The Lowest Interest Rate Does Not Always Produce The Lowest Monthly Payment.

You might ask, how can that be possible?  This is, because the interest rate is not the only thing that can have an impact on the monthly payment.  Depending on the downpayment that a Borrower makes, will have an impact on what Mortgage Program will be best.  For example, the Mortgage Program with the lowest 30 year fixed interest rate in Connecticut is the Connecticut Housing Finance Authority (CHFA), which is an FHA Insured Loan.  The CHFA interest rate this week is at 2.75%, which is an amazing interest rate, and CHFA is an excellent Mortgage Program, especially for First Time Homebuyers who do not have enough money for a Downpayment and/or Closing Costs.  CHFA also has an option for Downpayment and Closing Costs Assistance.  Even if the First Time Homebuyer has the minimum 3.5% Downpayment, CHFA may still be the best option. 

However, as the Borrower increases the amount of the Downpayment, CHFA may not have the lowest monthly payment in comparison to a Conventional Mortgage Program, even if the Conventional Mortgage Program has an interest rate 1% higher than the CHFA Mortgage Program.  Lets look at four examples of a property selling for $200,000 with a 30 year fixed mortgage.  Since it is the same property, the taxes and homeowners insurance will be the same, so the difference between the four examples will be:

  • Interest Rate
  • The Loan Amount
  • Private Mortgage Insurance (PMI) or the Monthly Insurance Premium (MIP)

First example is a $200,000 property with a 5% down:

  • CHFA Mortgage With 2.75% Interest Rate:
    • Principle & Interest ..... $789.23
    • MIP .......................... $190.00
      • TOTAL ............... $979.23
  • Conventional Mortgage With 3.75% Interest Rate:
    • Principle & Interest ..... $   879.92
    • PMI .......................... $   148.83
      • TOTAL ...............$1,028.75

Second example is a $200,000 property with a 10% down:

  • CHFA With 2.75% Interest Rate:
    • Principle & Interest ..... $747.69
    • MIP .......................... $178.21
      • TOTAL ...............  $925.90
  • Conventional Mortgage With 3.75% Interest Rate:
    • Principle & Interest ..... $833.61
    • PMI .......................... $  93.00
      • TOTAL ................$926.61

Third example is a $200,000 property with a 15% down:

  • CHFA With 2.75% Interest Rate:
    • Principle & Interest ..... $706.16
    • MIP .......................... $171.26
      • TOTAL ...............  $877.42
  • Conventional Mortgage With 3.75% Interest Rate:
    • Principle & Interest ..... $787.30
    • MIP .......................... $  53.83
      • TOTAL ............... $841.13

Forth example is a $200,000 property with a 20% down:

  • CHFA With 2.75% Interest Rate:
    • Principle & Interest ..... $664.62
    • MIP .......................... $158.41
      • TOTAL ...............  $823.03
  • Conventional Mortgage With 3.75% Interest Rate:
    • Principle & Interest ..... $740.98
    • MIP .......................... $000.00
      • TOTAL ............... $740.98

As you can see with a 5% Downpayment the CHFA Mortgage with the 2.75% Interest Rate is the best option.  At a 10% Downpayment the CHFA Mortgage with 2.75% Interest Rate and the Conventional Mortgage at 3.75% Interest Rate are about the same.  At a 15% Downpayment the Conventional Mortgage with 3.75% Interest Rate is the better option.  And at a 20% Downpayment the Conventional Mortgage with a 3.75% Interest Rate is by far the better option.

So even though the Conventional Mortgage has a 1% higher interest rate it is the better option in two of the scenarios and the same in the third scenario.  The only time that the lower interest rate mortgage program is the better option is at the lowest Downpayment.

The examples above clearly show that the The Lowest Interest Rate Does Not Always Produce The Lowest Monthly Payment, in fact it can in many cases have the higher monthly payment depending on the Mortgage Program.

Tomorrow I will compare costs between Truth-In-Lending Statements and Amortization Schedules for a Conventional Mortgage, and a FHA Mortgage

 

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 Info about the author:

George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com

Comments (2)

David Popoff
DMK Real Estate - Darien, CT
Realtor®,SRS, Green ~ Fairfield County, Ct

Well if I was buying I would do the 20% down, otherwise maybe I should just wait and save.

Feb 13, 2013 11:17 PM
Barbara Bartell-Kamp
Keller Williams NY Realty - White Plains, NY
Westchester County NY Rentals, Condos, Coops, Home

If my two recent sales that were 3.5% down FHA loans "waited", they may never have been able to buy a home, and with small children and in their 30's...they wanted a home. Sometimes FHA loans are a better way to go for young couples who need the extra cash to renovate a home.

Feb 13, 2013 11:21 PM