Mortgage Comparison: Rates Are not the Only Thing!
Comparing mortgage rates is an important part of shopping for a mortgage, but there are other factors involved when buying or refinancing a home. While low mortgage rates are emphasized by mortgage advertisements, thorough mortgage comparison requires consideration of more than mortgage rates:
- Loan type: both fixed-rate and adjustable-rate mortgage loans are available.
- Length of repayment term: comparing a 30-year loan to a 15-year loan, or comparing an existing mortgage term to the term of a refinance mortgage are examples of calculations connected to comparing mortgage rates.
- Mortgage insurance requirements: different mortgage programs can require different types of mortgage insurance, some of which cost more than others. For example, someone wishing to buy a home with a smaller down payment might choose between FHA home loans, community mortgages, conventional loans and VA or USDA products. All have different mortgage insurance premiums.
Mortgage calculators can be used to compare loans, but they provide estimates only. Information entered into a mortgage calculator affects the calculation that comes out. Variables including shifting mortgage rates, borrower credit scores and actual mortgage amounts can affect the real-life outcome. Results obtained from mortgage calculators are strictly estimates rather than best-case scenarios.
Personal and financial goals are important to consider when choosing a mortgage or refinance loan. The length of time borrowers plan to live in a home they're buying or refinancing can influence the choice of a mortgage. For example, first-time buyers may be looking for an affordable way to "get their foot in the door" of a first home. They'll likely move on in a few years as family and career changes occur and other life events intervene. In this case, a 5/1 adjustable rate mortgage that has a lower rate for the first five years than a fixed rate mortgage could be a good choice if the borrowers plan to move on within five years.
Putting the End Before the Beginning: Pre-Payment Penalties and Retirement Plans
Mortgages come with terms and conditions that may amount to a "so what" in the excitement of buying a home, but they can gain importance when it's time to sell a home or when homeowners approach retirement. A pre-payment penalty may be charged if a home is sold or refinanced and the mortgage is paid off before a date specified in the loan documents. Conditions like pre-payment penalties (which can sometimes get borrowers a lower interest rate) should be completely understood before accepted.
Refinancing to a 15-year mortgage can help homeowners achieve a mortgage-free retirement. While monthly payments are higher for a shorter loan term, mortgage rates are lower and there's less interest paid over the loan term. It's possible to save thousands of dollars in accrued interest. Here's a mortgage comparison of a 15-year mortgage and a 30-year mortgage of $250,000 for 30 years at 4.125 percent and for 15 years at 3.300 percent. Principal and interest payments would be $1,211 for the 30-year loan and $1,762 for the 15-year loan. A mortgage rate comparison over the full term of each loan reveals that interest paid over the life of the 30-year loan would be $185,960. while interest paid over the entire term of the 15-year loan would be $67,160. This amounts to a potential savings of $118,800. This mortgage comparison is for illustrative purposes only, as most mortgages are paid off before their entire repayment term.
Mortgage rate comparison is a great first step toward finding the best mortgage option, but the "big picture" and its variables are important when selecting a mortgage. Home buyers and homeowners can use mortgage comparison factors to review multiple mortgage quotes.
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