If you’ve heard of Zillow, and like it, then you need to check out FinestExpert.com. A guest post from Dr. Boyer, the article argues that one can’t simply look at interest rates when considering mortgages. Understanding other factors, like how long you intend to keep the loan, are required in order to make the right decision.
“How do I compare rates to find the best mortgage?” is often the first question people ask when considering mortgage refinancing or when looking at homes for sale as investment property, a second home, or primary residence. Industry standards are evolving but it is still difficult to compare mortgage interest rates on an apples-to-apples basis between different mortgage lender loan programs.
To compare home loan rates, it is important to compare the same type of bank mortgage loan program – e.g., start with a fixed mortgage and pick a 30 year mortgage or a 15 year mortgage. Then there are three keys to evaluate the best home mortgage loan for you.
1. Home loan rate (aka interest rate) is the obvious choice because it appears simple and straight forward and dictates the monthly mortgage payment. You can use almost any good mortgage calculator to get an amortization schedule showing your loan payment as being composed of both principal payments and interest payments. Unfortunately, mortgage interest rates can be easily manipulated by allowing for lower loan rates when you pay additional mortgage points. The result was that unscrupulous lenders would advertise the lowest rate in town, drawing people in, but then smacking them with extremely high loan fees.
2. Annual Percentage Rate (APR) attempts to solve the problems of simply comparing home mortgage loan rates by including all of the lender fees to calculate the true loan rate that is effectively being charged by your mortgage broker. Per the Truth in Lending Act (TILA), mortgage lenders are required to disclose this information as the APR to give you a consistent means of comparing rates and programs. But, the APR calculations assume that you are comparing 30 year mortgage rates (or whatever your term) and that you will hold your loan until it is paid off in full.
3. Hold Time Context. Unfortunately, both current loan rates and APR comparisons are insufficient to determine whether or not the home mortgage loan being offered is right for you. Using either of these is like using a single snapshot to convey motion – you just can’t do it. The loan rate and the APR typically fail on opposite ends of the spectrum. It is necessary to understand the context in which your mortgage loans will be used. Are you likely to own the home (or loan) just a few years? Then, the higher interest rate and possibly a higher APR might be the better loan for you. Or are you more likely to hold onto it for 10+ years? In which case, paying more costs to get a lower interest rate and lower APR is likely better for you. (Please note, the number of years until a cross-over will vary with the interest rate and the loan closing costs differentials.)
You need to compare rates by manually analyzing the amortization schedule of each loan in question (identifying total principal and interest paid) or else by using a loan comparison tool that will graphically show you the time frame during which each loan is better than the other.
The best mortgage interest rate is one that fits you, regardless whether it is for a mortgage refinance, bad credit loan, or home loan mortgage. To determine the best refinance mortgage rate for you, either check the amortization schedule of each loan or use a loan comparison tool.
About the Author
Robert T. Boyer, Ph.D. is the co-founder of FinestExpert.com, the place real estate investment property search and analysis. Boyer invented the concept of Real Estate Financial Planning. He is both a licensed mortgage lender and real estate agent, living in San Diego, CA.
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I would’ve definitely thought about the first point, and maybe even the second one about total APR.
But I probably wouldn’t have thought about the 3rd point, the total costs over time. I don’t see this one mentioned too often. Great post!
@ Darren:
Great – glad you enjoyed it and took something away. Are you currently looking to buy a home? If so, what resources are you using to research?
@ Dr. Dean:
Thanks. Will check it out.