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?
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
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
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.
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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.)
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