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How To Compare Home Mortgage Rates For Your Loan
By EchoBay Loans Staff Writer

You're shopping for a home mortgage loan and you're doing your best to compare the current home mortgage rates. One company offers you a 5-percent interest rate and another offers you 6 percent. The decision seems easy, doesn't it? Five is less than six, so you assume you should forego the 6-percent loan and go with the 5. Many consumers are surprised to find out that this choice isn't always the best choice.

If choosing the mortgage that's best for you isn't as cut and dry as picking the company offering the lowest home mortgage rate, how do you decide which mortgage loan is the right one? There are a number of factors that will help you determine which mortgage loan you should go with and it is important to understand why you shouldn't base your entire decision on home mortgage rates alone.

The three main factors that you are going to be looking at when you are comparing mortgages are the home mortgage interest rates, the points involved, and the annual percentage rate, otherwise known as the APR. Unlike looking at interest rates alone, the APR allows you to see the total cost of the home mortgage loan by figuring costs like closing fees and points into the calculation.

The first thing you need to do when comparing mortgage rates is to make sure that you are comparing apples to apples, and not apples to oranges. Adjustable-rate mortgages normally carry a lower initial interest rate than fixed-rate mortgages. However, there are no guarantees that your mortgage loan is going to remain at that initially low rate. The interest rates of adjustable-rate mortgages can, and often do, go up during the course of the loan. Many people who do opt for adjustable-rate mortgage loans are often dismayed years down the road when they find that they are paying a higher interest rate than they would have been if they would have opted for a fixed-rate mortgage at the time of their home purchase.

The apples to apples concept is not only important when considering home mortgage interest rates, but is also important when comparing APRs. This is because not all lenders will use the same calculation when determining the APR of their loans. Because of this, its important to know what factors are being calculated when you are quoted an APR so you can make sure that you truly understand which lender is offering the better rate, and not just a more attractive calculation.

In addition to ensuring apples to apples comparisons, you'll also want to consider how long you plan on being in the home you are purchasing. Normally when an APR is being calculated, it's done so with the assumption that the loan is going to run to term. This means that the APR you are quoted may not be the actual APR that you pay if you refinance, sell your home, or pay off your mortgage early.

Points are another factor that you're going to need to take into consideration. The loans with the lower interest rates normally come attached to higher points. The higher the points on a mortgage loan, the lower the interest rate will be. Points are normally paid by the buyer at closing. It can be thought of as purchasing a discount on your mortgage rate. This can be very beneficial to people who plan on staying in their homes for a long time, but for those thinking about selling their homes within a few years, points don't normally pay off.

To determine if paying points for lower home mortgage rates is the right choice for you, you need to determine your breakeven point. The breakeven point is the moment at which the cost of the points you paid at closing have been paid for by the money you've been saving from the lower interest rate. A basic way to calculate your approximate breakeven point is to determine how much money you will be saving each month with the lower interest rate. Then you'll want to divide the cost of the points by that monthly savings amount to figure out how many months it will take you to break even.

For example, if you are borrowing $200,000 with a standard 30-year mortgage and the interest rate without points is at 6 percent, the monthly payment amount would be $1199.10. Each point will cost 1 percent of the total mortgage amount; so on a $200,000 mortgage, each point will cost $2000. Each point you purchase will generally lower your interest rate by 0.125 percent. Say you purchase two points. The cost would be $4000 and your mortgage interest rate would be reduced to 5.75 percent. Your monthly mortgage payment would then be $1167.15, saving you approximately $31.95 each month. Since the cost of the points was $4000, you would need to divide that amount by $31.95. In this case, the equation equals 125 months or approximately 10 years. Therefore, your break even point would be at 10 years.

If you plan on selling your home before this breakeven point, you're better off not paying for points and going with the mortgage that has the higher interest rate, but lower points. However, if you plan on being in your home for a longer period and will be there long after your breakeven point, the lower-interest, higher-point loan may be the best option for you. If the breakeven point is close to the time that you think you may be selling your home, there are other factors to take into consideration that can help you with your decision. The fact that the points you pay on your mortgage are tax deductible may make up for any losses you might incur should you sell your home just prior to your breakeven point.

Because people who plan to stay in their homes for a longer period are more likely to benefit from paying points, and because these consumers will generally not benefit from an adjustable home mortgage rate mortgage, they are normally better off going with a fixed-rate, high-point, low-interest mortgage. People who do not plan on keeping their homes for more than a few years are better off not paying extra for points, but can take advantage of the adjustable-rate mortgages that won't have much of a chance to increase before they sell their home.


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