Loan Program vs Interest Rates

When shopping for a mortgage the most important factor is the loan program, not the rate you see. Don't be misled by a lowball rate and be sure to check out the specific details of the loan program. Most mortgages have either a fixed rate (payments remain the same for the life of the loan) or an adjustable rate (payments adjust up or down in accordance with national interest rates) and a term (amount of time you have to repay the loan) of either 15 or 30 years.

Down payment requirements will differ from program to program. There are many first-time buyer programs that will require as little as 3% down, as opposed to most conventional programs that will require up to 5%-20% of the new home's sales price.

Getting a quoted rate is fools gold. Your rate is determined by many factors including loan program. Other factors include credit score, loan amount versus property value, combined loan amounts versus property value, property type, property occupancy, and last but not least income versus mortgage debt and total debt.

It is always more important to get the right mortgage loan than one with the lowest interest rate. For instance, an Adjustable Rate Mortgage (ARM) with a low teaser rate is often not right for a home buyer who cannot bear the risk of fluctuating payments.

Some loan programs have payments based on interest rates as low as 1% which can save you hundreds of dollars in minimum monthly payments, but this is not a very good option for the majority of people. The interest rate is typically adjustable each month, so you may end up paying much more in interest than on a fixed rate mortgage. It is always important to examine your loan program before making a decision, rather than just look at the monthly payment.

As a home owner you really need to evaluate your overall financial goals. Do you want the lowest mortgage payment possible or do you want a mortgage program that will build equity quickly? These are just a few of the questions that you have to answer before you start to look at loan programs and interest rates. If you want a low payment and are not concerned with building equity, then an interest only loan may be a good option for you. If you want to pay down your mortgage quickly and build equity, then you may be better off with a 15 year fixed mortgage.

In the end, whether or not the loan accomplishes your goals is what matters.

When being quoted an interest rate, make certain that you can lock it for a period long enough for your loan to close. Locking a low interest rate for 15 days is useless if your loan will not close within the rate-lock period.

Interest rates, while important in some senses, have very little to do with whether or not you get the best deal when your refinance. Neither do "points". For the majority of homeowners, what matters the most is whether or not they obtained the loan program which most comprehensively improved their financial situation.

While most mortgage shoppers know about the basic parametric terms of mortgage programs and mortgage interest rates, the nuances of ARMs, pre-payment penalties, call-ins, insurance, and approval for special situations such as deferred "section-1" clearances, are difficult for non-experts to understand and can result in a consumer getting "virtually locked-in" to a broker that their buyer's agent recommended so that a real-estate transaction will go through.

Choosing the right loan program is the most important factor when shopping for a loan even more important than the interest rate. Borrowers should take into account credit, income, assets, collateral, and future plans when choosing a loan program. Mortgages with a low interest rate may end up costing more in the long run when adding in closing costs and future plans.

The appropriate loan program is a higher consideration than the interest rate. Loan programs can have interest rates that change, making only looking at initial rate problematic.

» DISCLAIMER: The information contained in this article on 'Loan Program vs Interest Rates' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.