General Consumer Information

Is the Interest Rate the Most Important Factor?

The answer is usually no. Interest rates are indeed important, but not necessarily the most important factor when considering a mortgage loan. While it is generally true that a lower interest rate results in a lower payment, it is important to understand that it is not always true, and that there are several other factors that should be taken into consideration when selecting the mortgage loan that is right for you.

Unfortunately, many consumers focus too heavily on the interest rate because it represents the most easily identified aspect of price when it comes to a mortgage loan. This can open the door for less reputable lenders to take advantage of consumers who are too focused on the interest rate, and who may not appreciate the importance of other factors.

Paying "Points"

When considering a mortgage loan, one of the first questions you should answer is how much money you're willing to spend to secure the necessary financing. You can pay money up front in order to lower the interest rate. That process is called paying "discount points." These are the funds paid at closing to obtain a particular loan program and/or interest rate. One discount point equals one percent of the loan amount. Discount points may be paid by either the buyer or the seller.

Paying discount points generally allows for a lower interest rate. In effect, you can buy down the rate by paying money up front. Unfortunately, some consumers can be mislead by an offer of a very low interest rate when they either are not told, or do not understand, that the low rate requires payment of points. While this is certainly not limited to the Internet environment, it seems a common practice for Internet lenders to offer very low rates on their homepage - rates that require points to be paid. This type of rate tactic is also used by lenders who advertise interest rates in local newspapers.

Fast Fact

Mortgage interest rates move up and down very much like the stock market. Rates can move on a moment-to-moment basis. There is absolutely no way for anyone to know how interest rates may change an hour from now, let alone a day or week from now.

Keep in mind that advertising generally requires production of materials and advance scheduling for placement of those materials. Those requirements mean days or weeks of planning and preparation.

It can be very beneficial to consider how a lender who advertises an interest rate today, for instance in today's newspaper, could have possibly known what the rates would be today - when that advertisement was produced days in advance.

While interest rates for consumer loans - such as an automobile loan - are more stable and predictable, mortgage interest rates move constantly. Therefore, we encourage a healthy level skepticism toward advertisements for mortgage loans that offer a specific rate. It's rather like a stock broker promising that a certain stock will be trading at a certain price - next week.

While the option to pay points is a legitimate and sometimes preferred practice, you should clearly understand what is required in order to obtain any specific interest rate or loan type. Be sure to inquire with your lender about any requirement of paying discount points. You may want to pay points, you may not.

How long do you intend to own the home?

This is another important question to answer before considering an interest rate. The length of time you plan to own the home will help determine the type of loan you choose, and thus, the corresponding interest rate(s) for that loan type. For instance, if you intend to own the home for a short period of time, a 30-year fixed-rate mortgage is probably not the right loan for you. However, when inquiring about interest rates, the 30-year fixed-rate loan is the standard reference. In your situation, an adjustable rate loan or a loan with a balloon payment might best suit your needs. Therefore, information about 30-year fixed interest rate loans would be of virtually no use.