Let's be real ..... for most people, owning a home means taking on a mortgage. The catch is that you need to pay back that loan plus interest ..... and those few percentage points add up quickly. If you borrow, let's say, $400,000 over 30 years, with a rate of 5%, by the time your loan has matured you've paid a total of $373,023 in JUST interest. That's almost the same amount of the original loan!
The good news is that interest rates are at a low right now, which could potentially save you a ton of money! The better news is that there are ways to nudge the interest even lower. Here are some CRUCIAL questions you need to ask your lender to make sure you're getting the best for your buck!
‘What kind of loan would work best for my circumstances?’
Loans are not one-size-fits-all. The loan you choose should be fit for you
Generally speaking, there are two types: fixed-rate and adjustable-rate mortgages. With a fixed-rate mortgage, your interest rate remains the same throughout the term of the loan, whereas an adjustable-rate mortgage is fixed for an initial period—say five or 10 years—but then will start to adjust regularly based on market indexes. The benefit of an ARM is that your initial interest rate is usually lower than with a fixed-rate mortgage. The downside is that after that initial period, those interest rates can end up much higher. Still, an ARM can make sense, and save you a lot on interest, in certain circumstances. For instance, if you plan to live in the home for less than five years, you may escape the adjustments altogether before you sell.
‘How much can I lower my interest rate by paying points?’
“Think of points as a prepaid finance charge to reduce your interest rate,” says Fleming.
For instance, say you bought a 30-year, fixed-rate, $400,000 loan at a rate of 5%, for which you’d pay $2,147 per month. Paying one point upfront would lower that rate by a 0.25 percentage point to 4.75%; paying two points would nudge that down to 4.5%. That would lower your monthly payment to $2,027. Which all sounds great, but keep in mind you have to pay for those points upfront—about $8,000 total.
So, it makes sense to pay for points only if you live there long enough to recoup the costs with lower interest. In this example, you’d have to remain in your home for at least six years before you break even and start reaping the benefits.
‘Am I qualified for special loans that can lower my interest rate?’
Certain circumstances can lower your interest rate as well. For example, some lenders have reduced rates or special loans available to those who have served in the miltary, and first time home buyers may have access to a rate tailored more specifically for them. Don’t assume you don’t qualify—there are low-interest loan programs for doctors, teachers, and nurses.
Always, always, always ask! The worst answer you'll get is a no, and you weren't expecting anything above and beyond anyways! ;)