What to Consider When Choosing the Lowest Mortgage Rates

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Author: Allen Young

Buying a house is an exciting and often confusing endeavor, especially if it is your first time. There’s so much information to digest and understand about mortgages and interest rates â€" some of it simple to understand, but much of it so complex that even experts don’t always understand it. There are, however, a few simple facts about mortgages that will help you in finding the mortgage that suits you best.

Your monthly payment is determined by three things â€" the amount of money you borrow, the interest rate on your mortgage and the number of months that you pay.

Those three factors work together in various ways to cost you more money or save you money, either in the short term or over the course of years. In general, a lower interest rate means lower monthly payments and/or a lower overall cost for your loan. However, in some cases a loan with a lower interest rate may mean you’ll pay a higher monthly payment for a shorter period of time, or pay more for your loan in the long run because you’re paying for a longer period.

When comparing loans to choose the lowest mortgage rate, be sure you’re comparing apples with apples.

The mortgage rate is only one component that determines the cost of your loan. To get an accurate comparison when you’re looking for the lowest interest rate, be sure that all the other components of the mortgage are the same or the interest rate won’t tell you much at all about the overall cost of the loan.

For instance, if you take out a $150,000 mortgage for thirty years at 6%, your monthly payment will be $899.33, and you’ll pay a total of $323,758 over the life of the loan. If you opt instead for a twenty year mortgage for the same amount at 7.25%, your monthly payments will be $1,185.56, but your total amount paid over the life of the loan will be $284,534 â€" an overall savings of almost $40,000. Because the terms of the loan are different, a higher interest rate results in major savings.

Consider other factors that may affect the affordability of the mortgage.

As demonstrated in the example above, a lower interest rate can result in a lower monthly payment â€" but depending on the other terms of the loan, it could mean that you’ll pay more in interest over the life of the loan. While mortgage interest rates are important, don’t make the mistake of assuming that the best loan for you is the one with the lowest interest rate. Be sure to consider other factors that may affect the loan’s affordability.

In addition, some lenders may offer special perks that will make your loan easier to afford and manage. Is there a possibility that you’ll be moving in less than five years? Will you be considering a mortgage refinance to get a better rate in a few years? Then you’ll want to be sure that the loan you accept carries no penalty for early repayment. Other important perks may include the option of deferring payments or taking a payment vacation once in a while without incurring a late or missed payment penalty.

Get at least three quotes from three different lenders to get the lowest possible mortgage rate.

Don’t be satisfied with the first mortgage loan that you’re offered. Each lender has its own policies and standards for granting loans and establishing mortgage rates. The credit score that qualifies you for a 5.25% mortgage with one lender may make you eligible for a 5% mortgage rate with another. Most financial experts recommend getting quotes from at least three different lenders to get the best range of loan offers for your selection.

Consider buying points to lower your mortgage rate furtherr.

Buying points is a way of pre-paying interest on your mortgage. Each discount point that you buy will knock 1/8th of one percent off the interest rate you’re offered, and typically costs 1% of the loan amount. Thus, buying one point on a $100,000 mortgage with a 7.5% interest rate will typically cost $1,000 and reduce the mortgage rate to 7.375%.

Before you decide that paying points on a mortgage is the best way to lower your mortgage rate, do the math to determine whether you’ll actually save money that way. Paying points will increase the amount of cash you need to pony up at closing, and only makes sense if you’ll be in the new house long enough to break even on the savings of your monthly mortgage payments.

While getting the lowest mortgage rate you can is one good way to lower the cost of your mortgage, interest rate is not the only determinant of the best loan. Be sure to consider all factors in choosing the loan with the best interest rate for your needs. Shopping around for the best loan will ensure that you are getting the best possible deal on a mortgage for your new home.

Allen Young is a freelance writer who writes about specific topics such as how to find the lowest mortgage rates .