Should I accept a higher rate to pay my closing costs?

Should I accept a higher rate to pay my closing costs? It depends. Before we get into the details, let's review some terminology.

1. The Note Rate is the rate that it is used along with the term or amortization to determine your monthly principal and interest payment.

2. The Annual Percentage Rate (APR) is a calculation that is used to express the mortgage related costs of a loan on an annual basis.

3. The Par Rate is a rate with neither discount or premium pricing.

4. Premium Pricing is a credit to the borrower.

5. Discount Points are used to buy a rate down and paid by the borrower.

Now you have some basic mortgage terminology, let's look at a few loan scenarios and see which loan you would pick. See below three loan scenarios based on a 30 year fixed loan with a 20% down payment assuming no other mortgage related costs except for discount or premium pricing if applicable:

The loan scenarios above are not an advertisement of rates and or a commitment to lend, they are strictly used for demonstration purposes.

At first glance, you probably went straight for the 4.25% it has the lowest cost and payment. However, this is where the "it depends" comes in. If you compared the par rate option with paying 1% or one point of the loan balance for the lowest rate, it would take you 68 months to break-even, that's little over five years. A lot can happen in five years, marriage, new born child, refinance, upgrade home, install a pool, or relocation. There are many other life events that could keep you from earning your $2,500 back.

Secondly, the highest payment and cost option is the premium option. On the premium option, you have $2,500 more in your pocket compared to the par rate option and $5,000 more compared to the discount rate option.  Again, reviewing the possible life events mentioned above that have caused folks to refinance or sell their homes in the past can help you decide what to do. The premium option provides cash preservation for home upgrades, trips to home depot, short term savings. Additionally, the extra cash on hand could help buy your home that is not appraising for the sales price.

When shopping for a home loan, seek a licensed residential mortgage loan originator who you trust will review your situation and provide options. Reviewing your options is a small investment of your time versus paying years on a loan. Ask yourself some tough questions and review your past to look into the future.

In Texas, contact Jimmy Smith for questions or a no obligation loan consultation.

 Jimmy Smith, NMLS#1089067

jsmith@alliancemtggroup.net, (214) 872-9091 Ofc