Jeans and Mortgages: It's All About the Fit.
Chris R. Poli
Jeans and Mortgages: It’s All About the Fit
Believe it or not, picking the right mortgage is a lot like buying a pair of jeans- when you know your size, the style, and the brand that you like it really makes finding the right pair pretty simple. The problem is, while most people have a good sense for what makes up their dungaree of choice; very few truly understand the determining factors when it comes to picking the right mortgage. In many cases, mortgage consumers turn to friends, family and the abundance of information out there for guidance. While doing your research is never a bad idea, even the most reliable source for information could be misleading if it doesn’t fit your needs. For example, it would be like buying the exact pair of jeans your friend was wearing, size and all, without trying them on first. Your friend might convince you that they are the greatest pants they’ve ever worn but if you go to the store and find they just don’t fit right, you’re not going to buy them. Mortgages are no different. The right mortgage is not the one that your friend has, or the one you read about in the Wall Street Journal, but rather the one that most directly matches your needs based on the options available to you.
Here are a couple examples of things to think about and discuss with your mortgage professional when determining which mortgage is best for you:
-Long Term vs. Short Term – Whether you are purchasing or refinancing, it’s always important consider the long and short terms implications, along with your personal plans. There are many different products and ways to structure a loan, each carrying different short and long term benefits. In order to understand which makes the most sense for you, you’ll need to give some thought to what your personal plan is as well.
Example: Anyone that plans to either sell their home or pay off their mortgage in the next 10 years should always consider an Adjustable Rate Mortgage (ARM). While viewed as somewhat “risky” because they are only fixed for a certain period of time, they are actually an excellent option for the right person. Generally speaking, ARMs offer lower interest rates and for someone who plans to sell or payoff the loan before that adjustment date can save a lot of money when compared to a 30 yr. fixed product.
-True or False? Lowest Rate = Best Deal – False. Many times mortgage shoppers get so fixated on securing the lowest rate that they overlook the other factors involved. In some cases, doing this might actually cost them more money. While the rate is certainly a critical component of your payment, there are other elements, such as closing costs and discount points, which have to be considered when comparing which rate is actually the best deal.
Example: Let’s say that Courtney is trying to pick between two different interest rates for a 30 yr. fixed mortgage. Everything else being equal, she can take the lower rate and pay $3,000 in points/closing costs, or she can take a slightly higher rate and pay $0 in points/closing costs. Rather than just assuming the lower rate is a better deal, Courtney is smart and evaluates the difference between the payments for each rate while also considering her personal plan. In doing so, she realizes that the lower rate only saves her $15 off her monthly payment compared to the payment for the higher rate. At $15/month, it would take her 200 months (about 16 ½ years) to make back the $3,000 she spent in points/closing costs upfront to get that rate. Since Courtney believes she will only be in the house for 5-7 years at a maximum, she realizes that she will never be able to make back the money she spent to get the lower rate. Therefore, the higher rate is actually a better deal for her.
Again, these are just a couple examples from the many which illustrate the importance of how different factors will decide which mortgage is right for you. Ultimately, the goal is to match the benefits of your mortgage with your personal needs and wishes. Lastly, always remember that the choice you make will be based on what options are available to you. Depending on your specific scenario, some options may or may not be available. When speaking with a licensed mortgage professional be sure to always ask what your options are. Even if you think you know exactly what you want, there’s always the chance that there may be something better for you.