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The homebuyer’s guide to mortgage interest

Looking for a new home is very exciting, but before you buy a home, make sure that you understand mortgage interest, interest rates and mortgage points.
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Looking for a new home can be very exciting and also stressful. Finding the living space that suits your needs, allows you room to grow, and meets your budget is a lot of work. In today’s market, finding a nice home for a reasonable price can be nerve-racking in the face of growing interest rates. Fortunately, First Tech can help you navigate the home-buying process and devise a plan to pay for your dream home without breaking the bank.

How mortgage interest works

A mortgage is the largest expense that most people have. When you’re ready to consider this expense, we suggest finding a home loan that fits your unique situation.

Many lenders offer both fixed-rate and adjustable-rate loans. Simply put, a fixed-rate loan is a loan with a predetermined life span (30 years, 20 years, etc.) and a monthly payment amount that doesn’t change (hence being fixed). On the other hand, an adjustable-rate mortgage (ARM) with a monthly rate can change at the lender's discretion within specific timelines and parameters that limit the changes they can make.

There’s more to it than just the loan type. Many factors such as the economy, credit score, prime rate, and more can determine your mortgage's interest rate, but ultimately the type of loan you take on, the initial payment you provide, and the life span of your loan will all inform your monthly payment. For example, if you choose a shorter-term loan, say 15 years, then the payment each month will be more compared to a 30 year loan. Often, the interest rate is lower on a 15-year loan and because you'll have paid the mortgage off faster than a 30-year loan, you'll have paid less interest. While paying less interest is attractive, be sure there’s wiggle room in your budget so you can continue making regular, on-time payments. A longer-term loan will allow you a smaller monthly payment, and if you wish to make additional payments when your financial situation allows, you can do that to pay the loan down faster. Be sure to check out our mortgage calculators and crunch your own numbers on interest.

Are mortgage interest rates going up or down?

It can be hard to say where rates are headed, and they fluctuate all the time. The most important thing though, is to ensure that your rate is within your budget and that you’re comfortable making regular payments.

When interest rates rise it can be a challenging time for buyers and sellers. Buyers may be forced to look for homes at lower price points to afford the regular monthly payments comfortably. Sellers may have less demand for homes at the price their home is on the market for. A “seller’s market,” is when home sellers have more power than potential buyers because demand outweighs supply. A “buyer’s market” is when the supply of homes is far greater than the demand. Historically, home prices rise when interest and supply are relatively low. When interest and supply are high, prices for homes may stabilize or decrease as demand may wane. The good news? The housing market is cyclical so with time it will flip in your favor.

What’s the difference between interest rate and APR?

Interest rate and annual percentage rate (APR) often get confused but there are differences you should know about when shopping for a mortgage. The APR reflects the cost of borrowing money based on the interest rate, fees, any insurance costs and loan term. Because APR includes interest rate, in addition to other costs, this is a good number for consumers to use to compare different loan programs. The Truth in Lending Act requires lenders to tell you both interest rate and APR.

What are mortgage points?

When you buy down your rate (also known as buying points), you spend money up front for a lower interest rate. A point equals one percent of the loan amount. This amount is added to your closing costs and paid at closing. Should you buy points? The answer depends on how long you plan to live in the house, how many points you can afford to buy, and if you have the cash to make it happen. 

Here’s some math. Let’s say you’re buying a home worth $425,000 with a down payment of $25,000. Now, let’s give your pretend mortgage a rate of 5.0%. If you buy two points, you would lower your 30-year fixed rate to 4.5%. Remember, each point lowers the rate by a quarter of a percent. However, each point on a 400,000 loan will cost $4,000, for a grand total of $8,000. Without factoring taxes and other home loan expenses, you could expect to pay $2,027 per month with the point-positive home loan. If you didn’t buy the points, your monthly mortgage payment would be $2,104. That’s a savings of $924 per year and a whopping $27,720 over the life of the loan. Your break-even point to recoup your $8,000 investment would be 8.7 years or 104 months. Is it worth it? Again, that depends on how long you plan to live in the home.

Should you ask for seller paid buydown?

Borrowers typically qualify for a loan based on their maximum monthly payment. When interest rates and home values are both considered high, offers to sellers tend to be lower. To make an offer more attractive to the seller, borrowers can offer the asking price with a sales credit, providing money at closing to incentivize the seller. This way, the seller still gets the asking price and retains more net proceeds than taking an offer under the asking price. The borrower can also afford the higher value home while keeping their payment as if they were purchasing at a lower asking price.

We can help you navigate

Fortunately, First Tech is here to support you as you’re looking to buy a home, and can help you navigate the ongoing changes to home prices and interest. We offer many home loan options with customizable plans to fit your budget. For more information about our home loans or saving on mortgage interest, please schedule a meeting with one of our mortgage professionals.