As you’ve probably seen, mortgage rates are up quite a bit over the past four or five months. Let’s talk a little bit about locking in a higher interest rate.
Yes, you heard me right. I’m not crazy. You might want to consider actually locking in a higher than market interest rate, and here’s why.
The reason why is because when you lock in a higher interest rate, we, as your lender, can pay your closing costs. Depending on how much higher the rate is, we can pay back to you a percentage of your loan amount that can then be applied to the closing costs.
Let’s say for example, we can give you a 1% credit as your lender and you’re borrowing $500,000. That would be a $5,000 credit towards your closing cost. That’s going to cover most everything on your closing, if not everything.
Let’s look at the difference in interest rates. Let’s say that you lock in a quarter percent higher interest rate in order to receive that $5,000 credit. That means your mortgage payment’s going to be $80 a month higher. Now that doesn’t sound great on the surface, no one wants a higher mortgage payment, but if you look at the numbers on that, it would take 62 months just to break even on the cost of paying those closing costs up front compared to that $80 a month worth of higher payments, higher interest, basically. If about it that way, chances are the economy’s going to go into a recession at some point over the next five years, probably sooner than later, maybe in the next 12 months, 24 months, who knows. No one has a crystal ball. Rates could keep going up. We all know that, but historically speaking, rates are likely to come down at some point over the next 60 months.
If rates come down, that gives an opportunity to refinance into a. Lower interest rate. That’s the time where it makes sense to pay the closing costs and get the lowest possible rate. This is kind of like a strategic way to get a lower cost, long term mortgage. Instead of paying the closing costs when you buy the house, pay the closing costs when you’re refinance at that much lower interest rate and get the biggest bang for your buck. Call me if you want to talk about that in a little bit more depth, look at your numbers on your particular transaction, see if those numbers make sense, if you want to consider this strategy of locking in a slightly higher interest rate. Once again, my name’s RJ Baxter, Fairway Independent Mortgage, have a great rest of your day.