When buying real estate property under a mortgage contract, buyers often have to decide which consideration is more important to their decision-making — interest rate or cost. Does the interest rate have more bearing than the cost, or is it the other way around?
South Florida’s local mortgage expert and Reach Home Loan’s director Brandon Brotsky sheds more light on these terms and their significance to the mortgage contract. Know the differences between them and gain some expert insight on which is more critical in making a home mortgage decision.
First thing’s first. Interest rate and cost are two different things. However, the two are interrelated so it’s understandable why you’ll often see them on the same page.
When we talk about the interest rate, it is the amount you pay based on the principal balance of the amount you borrowed.
On the other hand, costs are the expenses you incur when buying a home, such as monthly payments including interest, title fees, government charges, and many more.
Now that you know the difference between the two, it’s time to see the importance of these two elements. Brandon explains that determining the significance of interest and cost depends on you as the property buyer.
“Over that time, what we want to do to determine what’s more important to you is to know how long you plan to keep the property.”
Indeed, your plans on the property can determine which element stands out more. Of course, you need to assess if you’re planning to keep the property in the short-term or long term.
“The shorter you plan to keep a property, the more the cost matters. In contrast, the longer you plan to keep the property, the more the interest rate matters.”
Let’s assume the actual cost to buy a property is around $12,000. Over the next five years, you’ll pay another $60,000 worth of payments. Overall, the total cost is $72,000.
If you plan to keep the property in the short term, the cost of $72,000 would matter. The interest rate will be irrelevant in this matter. In contrast, the total cost will be irrelevant if you intend to keep the property long-term.
“Well, it makes more sense to take a higher interest rate which will increase the monthly payment. But by doing so, you’ll probably get a lender credit, and that lender credit will bring down your upfront costs.”
Lender credit is money from the mortgage lender that’s intended to help you pay upfront fees. With a higher interest rate, you can save on the upfront costs due to the lender credit. In the end, the relevance of the interest rate and cost will matter on the time you intend to keep the property.
Still confused about interest rates, costs, and home loans in general? Reach Home Loans can provide all the necessary guidance to help you make an informed decision. Our team can also walk you through the loan application process, as well as any other critical considerations that you may need to succeed in this next big step.
Moreover, we have designed home loan products specifically aimed at first-time home buyers. Call us now at 954-703-1465, and let’s work together to get you that dream house.
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