19
Sep
By Mike Pfefferman
Mortgage

The Impact of Interest Rate Changes on Your Mortgage Payment Over Time

When it comes to mortgages, interest rates play a crucial role in determining your monthly payments and the total cost of your loan. While fixed-rate mortgages offer stable payments, adjustable-rate mortgages (ARMs) can fluctuate with market conditions, leading to significant variations in your financial obligations over time. Understanding how interest rate changes impact your mortgage can help you better prepare for the future.

Fixed-Rate vs. Adjustable-Rate Mortgages

Fixed-rate mortgages offer a consistent interest rate throughout the life of the loan. This stability means your monthly payment remains unchanged, providing predictability and ease of budgeting. However, the trade-off is that fixed-rate loans often start with higher rates compared to the initial rates of ARMs.

Adjustable-rate mortgages (ARMs), on the other hand, have interest rates that adjust periodically based on market conditions. ARMs usually come with an initial fixed-rate period, after which the rate changes at set intervals, such as annually. The fluctuations in ARMs can significantly impact your monthly payments and overall loan cost.

How Interest Rate Changes Affect Your Payments

  1. Initial Period Changes: Most ARMs start with a lower interest rate than fixed-rate mortgages, which can make them attractive to borrowers looking for lower initial payments. For instance, an ARM with a 3% initial rate might offer lower payments compared to a fixed-rate mortgage at 4%. However, after the initial period—often 5, 7, or 10 years—the rate adjusts based on a specified index plus a margin set by the lender.
  2. Adjustment Periods: When the rate adjusts, it can lead to significant changes in your monthly payments. For example, if your ARM adjusts from 3% to 5%, your monthly payment will increase accordingly. This change can be substantial, especially if the loan term is long or if rates rise significantly.
  3. Rate Caps: ARMs typically have caps that limit how much the interest rate can increase at each adjustment period and over the life of the loan. While these caps provide some protection, they do not eliminate the risk of higher payments. For example, if your ARM has a cap of 2% per adjustment period, your rate could increase by 2% at each adjustment, potentially leading to higher payments over time.

Financial Impact Scenarios

  1. Rising Interest Rates: In a scenario where interest rates rise steadily, an ARM can become increasingly expensive. If you started with a 3% ARM and rates rise to 6%, your payments will rise accordingly. For a $300,000 loan, this could mean an increase from approximately $1,264 to $1,798 per month after the initial fixed period, translating to an additional $535 per month or $6,420 per year.
  2. Stable or Declining Rates: Conversely, if interest rates remain stable or decline, an ARM may still offer lower payments compared to a fixed-rate mortgage. For example, if your ARM’s rate stays at 3% or falls slightly, you could benefit from lower payments compared to the fixed rate’s higher payments.
  3. Long-Term Costs: Over the life of the loan, ARMs can sometimes end up costing more than fixed-rate mortgages if interest rates rise significantly. For instance, over a 30-year term, frequent rate increases can add up, resulting in a higher total loan cost compared to a fixed-rate mortgage with a higher, but stable, interest rate.

Understanding how interest rate changes affect your mortgage payments is crucial for managing your financial future. While ARMs can offer lower initial rates and payments, they come with the risk of increased payments as rates adjust. Fixed-rate mortgages provide stability but might start with higher rates. By considering your long-term financial goals and potential interest rate trends, you can make an informed decision that aligns with your financial situation and risk tolerance.

14
May
By Mike Pfefferman
Mortgage

How Do Mortgage Points Cut Your Interest Costs?

Those who are involved in the real estate industry likely know that mortgage rates are at an all-time low. At the same time, nobody wants to pay more for a house than they have to. Some of the most important factors that dictate how much someone is going to pay for a house include points and interest rates.

While interest rates are incredibly low, there is a way to make them lower. This comes in the form of points. This is additional money that is paid upfront to get a better deal over the life of the loan. Even though this sounds great in theory this might not be the best option for everyone. There are a few important points to keep in mind.

What Are Points?

Often, the lender is going to offer someone the option of paying points when the mortgage is created. This should be viewed as paying interest on the loan in advance. In exchange for paying interest upfront, the lender should offer to lock in a lower interest rate over the life of the loan. The more points someone purchases, the better the rate.

For example, paying one point of interest may reduce the interest rate on the loan by 0.25 percent. This is standard. Take, for example, a $200,000 home. One point on this loan would cost someone about $2,000. In exchange, the interest rate on the loan is going to drop by 0.25 percent. This might be worth it in the long run.

Discount Points

Other people might have heard about something called discount points. This is another term for mortgage points. The two terms can be used interchangeably. Typically, people can purchase as many discount points as they want, up to the limit of the lender. 

An Overview Of Origination Points

Another type of point that people might have heard about is origination points or origination fees usually expressed by a percentage of the loan amount. These are points that are charged to the borrower to cover the processing, or originating fees for the mortgage loan. These fees are included in the total closing costs disclosed when you apply for your home loan.

Origination points are almost always negotiable. The number of origination points that a lender is going to charge can vary from place to place. Therefore, always be sure to ask about origination points. There might be a way to get these points waived, saving the borrower a significant amount of money.

As always, your trusted mortgage financing professional is the best source of information for your personal mortgage situation.

08
May
By Mike Pfefferman
Home Mortgages

APR vs. Interest Rates

If you’re gearing up to dive into the world of real estate, there are a few key terms you’ll want to wrap your head around before taking the plunge. Today, we’re demystifying APR and interest rate, two crucial concepts that can impact your home-buying journey. Don’t worry, I’ll break it down in simple terms so you can confidently navigate the process like a pro.

Interest Rate:

Let’s start with the basics. The interest rate is the percentage charged by a lender for borrowing money to buy your home. It’s essentially the cost of borrowing the principal amount. When you’re comparing loan offers, you’ll often see this prominently displayed. A lower interest rate generally means lower monthly payments, which can be appealing, especially over the long term.

Annual Percentage Rate (APR):

Now, let’s add another layer of complexity with APR. APR includes not only the interest rate but also additional fees and costs associated with securing your mortgage. This could include things like origination fees, points, closing costs, and mortgage insurance premiums. Essentially, APR gives you a more comprehensive picture of the total cost of borrowing over the life of the loan.

So, what’s the big difference when it comes to buying a home?

Interest Rate is like looking at the sticker price of a car. It’s the upfront cost you’ll pay for borrowing money, expressed as a percentage.

APR, on the other hand, is more like the total cost of ownership of that car, including taxes, registration fees, and maintenance costs. It gives you a clearer picture of the overall cost of borrowing by factoring in those additional expenses.

Why does this matter in the context of buying a home?

Well, let’s say you’re comparing two mortgage offers:

·       Option A has a lower interest rate of 3.5%.

·       Option B has a slightly higher interest rate of 3.75%, but it includes points that lower the rate and have lower closing costs overall.

At first glance, Option A might seem like the better deal because of its lower interest rate. However, once you factor in all the additional costs included in the APR, Option B might end up being more affordable in the long run.

Understanding the difference between APR and interest rate empowers you to make informed decisions when comparing mortgage offers. It allows you to see beyond the headline numbers and consider the full financial picture.

So, as you prepare for your home-buying journey, remember to look beyond the interest rate and pay close attention to the APR. It could save you thousands of dollars over the life of your loan and ensure you’re making the best financial decision for your future.