When Do Low Mortgage Rates Become Bad?
Any honest mortgage lender in Albuquerque and Santa Fe will tell you that the property prices in these cities are forecasted to rise at least 2% in 2020. These real estate markets are very hot at the moment, and not negotiating for a favorable interest rate is going to make homeownership much more expensive for you.
However, getting a low mortgage rate is not always a positive thing. It may seem counterintuitive, but less interest does not necessarily equate to more savings. To make sense of this, let us examine the instances where the lowest mortgage rates may not be the best.
When the Rate Has to Be Bought Down
Buying down your mortgage interest is one of the fastest ways to get a rate reduction. It can be done by purchasing discount points, which can cost thousands of dollars each. These items will be part of your closing costs, so they have to be paid upfront.
A discount point may seem expensive at first, but it may be worth its steep price. Being able to reduce your initial mortgage rate offer by 0.25% or even 0.5% could mean a substantial amount of interest savings over the long term. However, the use of a discount point as a negotiating tool is viable only if you choose to stay put for a long period. Paying off your mortgage too early may defeat the purpose of buying down your interest rate.
If truth be told, a discount point is a misnomer; it is prepaid interest. If you do not keep your mortgage long enough, deciding to pay a portion of the overall interest beforehand may backfire on you.
When the Rate Is Adjustable
Generally, the interest rates attached to hybrid mortgages are below the market. This is the case because the loans are actually adjustable-rate mortgages (ARMs) with a fixed initial period.
During the “honeymoon phase,” the interest is low to help keep the monthly mortgage payments more manageable. But, when that period is over, it is subject for adjustment regularly, which is usually once a year.
ARMs are undoubtedly advantageous, but they are not for everybody. If you plan to be in it for the long haul, you will not enjoy financial security, especially if you have limited income. Despite the limitations in place, your monthly mortgage payment may go too high for comfort.
Generally, the borrowers who opt for an ARM plan to refinance down the road. But, if you want your mortgage payment to remain the same for the full term of your loan, then avoid products with a volatile interest rate no matter how hard they are being sold to you.
When the Rate Requires Automatic Payment
Some mortgage lenders agree to an interest rate decrease if you say yes to automatic payment, which is harmless as long as you keep your bank account open. Rate reduction done this way may be conditional, so you may lose the privilege along the way if you have to change banks for whatever reason.
Mortgage lenders are too shrewd to offer lower interest without getting anything in return. You should still aim to snag the most favorable deal available, but you must always understand the motivation behind the attractive mortgage rate to make sure it is not a trap.