I locked the interest rate on my house yesterday after weeks of waiting. I wasn't happy with the rate we got, even though it's actually the exact rate we were quoted on our original good faith estimate, and it's also better than the rate we originally budgeted for.
But when the government bought Fannie and Freddie and mortgage interest rates dropped a ton, I started to expect something better. But we didn't benefit from that interest rate drop at all.
At the time I put an offer in, I got a competing quote that was significantly lower. That was the day after the Fannie/Freddie takeover. It's very possible that the other mortgage company was just saying anything to try to get my business and that they never could have honored that quote. It happens all the time. Ultimately, I didn't go with that company because I knew nothing about them, and my instincts liked another lender better.
But not knowing much about the mortgage industry and interest rates myself, despite all the research I've done over the last year and a half (there's just so much to learn), I really don't know if I was offered the best interest rate possible, and I don't feel like I have any way of truly knowing. Try researching FHA mortgage rates online and you'll find a bunch of uesless, outdated, and wrong information.
If you've never bought a house, you may be wondering what the big deal is about interest rates. Current rates, which are in the 6-7% range, roughly, are historically low rates for mortgages and generally good rates for borrowing money for anything, period. But even a half point difference in the interest rate has a significant impact on our financial situation, both short and long-term. So when I was told that we were getting an interest rate that was a half point higher than what I had set my hopes on, I felt my heart sink. I basically felt like someone had just told me that I owed them an extra many, many thousands of dollars, money that I would no longer have for retirement because I would have to give it to an arbitrary banking system instead.
Then I found out that I had a couple of options. One option was to pay about a point to buy my interest rate down to the rate I wanted. The other option was to plan on refinancing in the next couple years.
My loan officer encouraged the refinancing option. Her reasoning was that if our home went up enough in value, we would be able to get rid of our private mortage insurance quickly. Since we are buying a foreclosure, we are theoretically getting a good deal and will see our home value go up significantly once the market improves.
However, with the market the way it is, I don't want to bank on our home going up that much in value that quickly. I actually expect it to go down for a while. Yes, home prices have dropped a lot, but the runup in housing prices actually started around 1999 if you look at the housing price charts, and houses in my area are only down to 2003-2004 price levels. That leaves plenty of room for further decline.
Also, the amount of our monthly mortgage insurance payment is similar to the amount our monthly payment would decrease by if we paid the point. So why not go with the sure thing that I can take care of now, then not have to think about refinancing? Applying for a loan has been stressful and time consuming, and I have no desire to do it again anytime soon. Further, refinancing isn't free--just like when you take out a loan, you have to pay closing costs.
So we decided to go ahead and pay the point. It's tax deductible, which eases the sting, and it will pay for itself in three years, which I think is very reasonable. I like the thought of having a loan that I can stick with for the long term if I want, and I love the thought of saving thousands of dollars in the long run by paying a little bit extra up front.
Photo by NCinDC
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