Premium Pricing Of Mortgage Interest Rates
Shopping for a mortgage when purchasing or refinancing a home can be a complicated process. Borrowers want the lowest rate, the lowest costs, and a pain free experience – and who can blame them? However, contrary to popular belief taking the lowest interest rate may not always be the best option and could cost you money in the long run. When securing a home loan you may want to consider Premium Pricing.
There are three factors to compare when shopping for a home loan:
– Interest Rate
– Origination Fee
– Points and/or Lender Credits
Contrary to popular belief, putting the most emphasis on the interest rate may not be the cost-effective strategy. By taking a higher interest rate a lender credit may become available which reduces the Closing Costs for loan. This strategy is call “Premium Pricing.” For example, let’s say that instead of taking a rate of X on a mortgage someone took a rate of X + .25% which increased the P&I payment by $50 per month AND doing so provided them a lender credit of $4,200.
In this example the borrower won’t “feel” the higher rate for 7 years (4,200 credit / 50 per month = 84 months = 7 years) AND that 7 year break-even could be longer when considering the Mortgage Interest Tax Deduction. This means that if the borrowers anticipated selling, refinancing, or paying off the mortgage within a seven year time period then they should take the higher rate since the extra $50 per month won’t add up to the $4,200 in credit. In some cases, many folks just prefer keeping the $4,200 in their pocket at closing and aren’t concerned with the slightly higher payment regardless of how long they have the mortgage.