Here are the top ten questions I’m most often asked by mortgage shoppers (in no particular order):
10. What’s your interest rate?
9. How much are the closing costs?
8. What is the term (number of payments) on the loan?
7. Is there a prepayment penalty?
6. What’s your interest rate?
5. Is there a balloon payment?
4. What’s your interest rate?
3. How big a down payment is required?
2. What’s your interest rate?
1. What’s your interest rate?
All of these are really good questions to ask. But the answers will be meaningless unless you first ask one crucial question. It’s a question you need to ask yourself before you start shopping for a loan. Ready? Here it is:
HOW LONG WILL I HAVE THIS LOAN?
Not how long will I keep this house, or how long will I live in this town, but how long will I have this loan? It’s not a question you can answer with 100% certainty, but it is a question worthy of some real reflection. Give it some thought. Is this a starter home that you’ll probably upgrade in a few years? Do you have a growing family that’ll need more space in the future? Is it likely that your job will move you to a new location at some point?
Ask yourself, “HOW LONG WILL I HAVE THIS LOAN?”
Your answer could save you thousands of dollars.
Here’s how: Interest rates and closing costs exist on either end of a teeter-totter. Push one side (interest rates) down, and the other side (closing costs) goes up. And vice versa.
So, is it better to pay a lower rate or lower costs? It depends on how long you have the loan. In general, the longer you’ll have your loan, the lower you want your rate to be. The shorter you have your loan, the lower you want your closing costs to be.
I have seen people pay huge closing cost bills in exchange for a screaming interest rate, only to refinance a year later and never really reap the benefits of that rate. Conversely, I have seen people pay no closing costs in exchange for a high-rate mortgage that they pay for 20 years, effectively paying their dodged costs several times over in the form of higher interest. It’s not just about finding the loan with the lowest rate or lowest costs or the right fixed/adjustable feature. It’s about finding the most appropriate loan that fits your risk tolerance, optimized for the length of time you intend to have it. Once you know your time horizon, you can pencil out the best deal. If you optimize your mortgage terms to correspond with your expected time horizon you can save yourself a pile of money.
I run these analyses all the time, so feel free to contact me if you’d like some numbers customized to your situation. As Tigger would say, TTFN.
Note: Please do not email personal financial information.