Think the Interest Rate always Matter??? The Lower the Better Right? Well not always True. Let's look at these charts to show you how to get the best deal.
Let's look at this simple chart below:
A B
All Your Debt $100 $100
Monthly Payment $6.00 $7.00
Total of all Payments $149.00 $212.00
Believe it or not, interest rate doesn’t always matter. Let me give you an example. Imagine two scenarios, A&B. (Illustrated Above) In both scenarios; your total debt is $100. Scenario A your monthly payment is $6.00 and scenario B your payment is $7.00 per month. Which scenario would you choose? A is the obvious answer. Now everything is still the same. In scenario A, you will pay a total of $149.00 over the life of the loan and scenario B you will pay $212.00 over the life of the loan. Which scenario would you choose? Scenario A is still the obvious answer, because your monthly payment is lower and you are paying less over the life of the loan. Now everything is still the same. In scenario A your interest rate is 8% and scenario B your interest rate is 6%. Which scenario would you choose? If you answered A, then you now understand the difference between interest rate and interest cost. (Illustrated Below)
A B
All Your Debt $100 $100
Monthly Payment $6.00 $7.00
Total of all Payments $149.00 $212.00
Interest Rate 8% 6%
Interest rate is only a number on a piece of paper. Interest cost is what the rate is going to cost you in dollars and cents. I know what you are thinking, “That’s not possible; if the rate is lower then the payment has to be lower.” Not true, when looking at a mortgage payment, you also have to calculate in PMI or Private Mortgage Insurance. Anytime you are dealing with a Conforming Loan and the Loan to Value (the loan amount divided by the appraised value) is 80% or above, you will be required to pay PMI.
The amount differs from loan to loan, but PMI can add a substantial amount to your payment. In addition, when PMI is required, it does not protect you, it only protects the bank. Therefore, in many of these situations going with another loan program (i.e. sub prime) that has a higher rate, but does not require PMI, can actually give you a lower payment. For example, if you have a home that is worth $112,000.00 and you have a mortgage of $100,000.00. If you were in a conforming loan you would be required opay PMI because your Loan to Value is 89.3% (100,000/112,000 = .893). Say that conforming loan is at 6.5%; your principle and interest payment would be $632.06/month.
Your PMI conservatively could run around $60.00/ month bringing your payment up to $692.06/month. Now, if your loan is with a sub prime lender that does not require PMI and your rate is 7%, your payment would only be $665.30/month. “Amazingly” that 7% rate costs you $26.76 less per month than the 6.5% rate. You can also take into consideration the tax savings you will receive. You see, while interest that you pay on your mortgage is tax deductible, Private Mortgage Insurance is not.
I could also illustrate interest cost versus interest rate with consolidating high interest credit cards into a 7% loan vs. not consolidating and just refinancing the mortgage into a 6% loan. Depending on how much additional debt there is to consolidate, you could save hundreds of dollars in monthly expenses while reducing the time it takes to pay off all your debts.There are many other examples I could use to illustrate this, but the best thing to do is discuss your personal options and savings with a mortgage professional.
As you can see, refinancing is not as simple as “What’s my rate?” The real question you need to ask when refinancing is, “What is my rate doing for me?” I encourage you to determine what your short term and long term financial goals are and discuss them with your mortgage professional. These professionals aren’t just there to get you “The Best Rate.” They are there to counsel you on how you can use the equity in your home to achieve your financial goals for today and tomorrow.
0 comments:
Post a Comment