How to Pick the Best Rate/Cost Combination for YOU

The Basic Principle - The less time you will keep a mortgage, the less money in closing costs you should pay. The longer you will have the loan, the more in closing costs you should consider paying.  Think of it like renting the money vs. owning the money.

Example 1: What if you are going to keep a mortgage for 1 year or less

$200,000 Loan
$0.00 Closing Costs
6.75% Rate
If you keep the loan for 12 months and then sell the house and pay off the loan, your loan costs are limited to the interest for the 12 months, or $13,500.00.

Same $200,000 Loan
$3,000.00 Closing Costs
6.00% Rate
If you keep the loan for 12 months and then sell the house and pay off the loan, your loan costs is the interest for for the 12 months, $12,000, plus the $3,000 in closing costs for a total of $15,000.00.

It's easy to see in the example above that the No Closing Cost loan was the best choice. We need to run the same calculations when deciding on the best loan structure for you.  How long will you be in the home?  How long will you need this loan?

Remember, rates and closing costs go hand in hand. The more up front costs you pay, the lower your rate. The less in up-front costs you pay, the higher your rate.

At Fairway Independent Mortgage Corp., all of our initial rate quotes are based on a Zero/Zero Platform, with  $0 Origination Fee and $0 Discount Points.  A 1% loan origination fee, or 1% discount point, ($2000.00 in our example above) typically "buys down" your mortgage rate by 0.25%.   When we do the math, it could take 4 to 5 years just to break-even on the extra fees.    

Example 2:  A Zero/Zero loan vs. A traditional loan with a 1% origination fee

           $200,000 Loan Amount                       $200,000 Loan Amount
           $3,000 Closing Costs                           $3,000 Closing Costs
           $0.00 Origination/Points                       $2,000 Origination/Points                        
           6.75% Rate                                          6.5% Rate 
           $1297.20 P&I Payment                        $1264.14 P&I Payment

The extra $2,000.00 in costs saves you $33.06 per month, therefore it takes 60 months just to break-even on the extra closing costs.  If you keep this loan for 5 years, you still have not saved one penny, just recouperated the extra closing costs.

Fannie Mae & HUD statistics show that a typical homeowner will not keep a loan longer than 3-5 years, either because they are moving or refinancing.  If that is the case and you don't know for certain that you will be in this home for 5 years, err on the side of caution.  Be very careful when getting rate quotes, because most lenders don't call their origination fee a "point".

And remember…

Higher Costs = Lowest Rates    Lower Costs = Higher Rates    No Closing Costs = Highest Rates