Compare Home Mortgage Interest Rates to Closing Costs

by BJ from Ohio USA

Ask Kate how to compare home mortgage interest rates to closing costs: Hi Kate, Do you think it is better to get 4 percent with $2100 in closing or 4.5 percent with $990 in closing costs? Seems to me that the second option of saving $1000 and taking 1/2 percent higher in the rate is better?



BJ continues... I'm not sure how to calculate this out. Any assistance is most appreciated! Thanks for posting a questions link!

Kate Answers: Compare Home Mortgage Interest Rates to Closing Costs

Ask Kate at Get-Your-Best-Mortgage-Rate.com
Dear BJ,

If you have a balloon floating around your house right now, go grab it. Squeeze one side. What happens? Yep, the other side pops out.

Comparing rates to fees is very similar. Choosing lower mortgage closing costs increases rates. Reverse direction by opting for a lower mortgage rate and you'll increase fees.

I find there are two ways to go about deciding the best route to take. One, by playing around with the numbers. Two, by considering individual circumstances.

Home Mortgage Interest Rates vs Closing Costs

Say you are borrowing $300,000 at 4.5 percent for 30 years. Your monthly house payments (without property tax or insurance) would be $1,520. But at 4 percent it would be $1432, $88 less.

However to save an ongoing $88 on monthly house payments, you would have to fork over an additional $1110 in fees. (Remember the balloon example.)

Let's assume the lower rate is appealing to you but you want to recoup the additional closing costs you paid for 4 percent. You make a deal with yourself to place the $88 you save each month back into your bank account. If you do this, you will find it takes about a year to replenish the $1110 you withdrew for additional closing costs.

This is a very simple formula but it will get your brain juices flowing! You can probably come up with other comparisons.

More To Consider Than Mortgage Rate

Compare Home Mortgage Interest Rates to Closing Costs
Now let's take into consideration your goals as a homeowner. How long are you going to stay in the house?

Why sink a lot of cash into a mortgage that you do not intend to keep long term? If you think about it, it would be similar to a luxury remodel right before you sell a house.

How about other uses for your cash? Is your car starting to rattle? Kids going off to college? A new baby on the way? Think about hanging onto your cash instead.

Of course, these are just examples and every homeowner has a set of individual circumstances. But like I said before, hopefully this will spark some inner dialogue and help you arrive at a decision.

Ask Kate or Comment

BJ, one more thing. Is this page helpful to you? I'd like to hear back from you. (To comment, look for the link at the bottom of this page.)

Or Ask Kate another question.

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Best wishes,

Ask Kate

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Mortgage Refinancing - Stick with 3.375% or buy down to 3.25%
by: Anonymous

Hello. I am in the midst of refinancing a mortgage. It will be a $275,000 loan.

I locked in a rate of 3.375% which will yield a monthly principal and interest payment of $1,215.

I could buy down the rate to 3.25% which would cost $1,375. ($275,000 x .5 point) The new principal and interest payment would be $1,196.82.

Please let me know if you recommend buying down the .5 point to reach 3.25%? Or should I should just stay at 3.375%?

Thanks for your help.

Hi Kate here.

Here's a rule of thumb. The longer you keep a mortgage, the more benefit you receive by paying for a lower-than-market mortgage rate. Yet the shorter the home loan is retained after paying for points, the more the bank tends to win.

In your example, you will save $19 a month after giving $1375 to the bank to buy down to the lower rate.

Maybe it's worthwhile if you have enough cash to pay for the half-point or sufficient equity to finance $1375, and are going to keep the mortgage for at least 6 years. But only you can decide.

Another reason for buying down a mortgage rate is to qualify for the monthly house payments. For some homeowners, $19 a month can make or break loan approval.

Best wishes, Kate

Refinance Origination Charge?
by: Jay from Minnesota

What should I be paying in a refinance origination charge? Is $3000 too much or in the ball park? Credit score 781.

Hi Jay, Kate here. For many years, origination fees were traditionally 1 percent of the loan amount. So if you were borrowing $300,000, you could expect your origination fee to be $3000.

But when junk fees began to creep into mortgage closing costs, origination fees did not go down. Plus the price of homes which increased loan amounts forced origination fees through the ceiling.

So today you have to look at the overall bottom line on a Good Faith Estimate. In other words, if you have no charges than an origination fee, $3000 might be reasonable. Or are you are borrowing $100,000 and excessive fees are piled onto the $3000 origination fee?

All fees are negotiable. For the best results in negotiating, offer something in return that saves time for the loan originator, like turning in complete, legible paperwork at one sitting.

Best wishes in your refinance, Kate

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