Is a fixed rated loan right for me and should I buy down my interest rate

When do I want a fixed interest rate loan?

If you believe that interest rates will soon be on the rise, a fixed rate loan will give you the security of a set interest rate and payment. Since most lenders believe that rates will rise, you will have to pay more for the fixed rate. Some lenders or mortgage brokers may try to talk you into some type of an adjustable loan that they believe will be advantageous for them. The fixed rate loan is the one you should use as your basis of comparison with any and all types of adjustable rate loans. Because of this, it is critical to know the best fixed rate loan that you can get. If you do not, your comparison with adjustable rate loans will be skewed.

You should always ask your lender or mortgage broker if you are getting the best rate being offered. Make it clear that you are not asking if this is the best rate you can get. You want to know if it is the best rate anyone can get. If the answer is no, ask for the specific reasons why you are less creditworthy than the strongest borrower. If you believe any of the drawbacks to getting the best rate can be rectified, ask what you must do to qualify for the best rate.

Always get specific information. If the lender tells you that your debt ratio is too high, go through your debts with the lender to see which ones you need to pay down or pay off. The extra money you saved from examining your spending habits may be used to get a better loan.

Should I try to buy down my interest rate?

Once you are convinced that you are getting the best rate you can get, ask about a buydown. You need to know how much it will cost, how much less the interest rate will be, and how long the lower rate will last. Then you do a simple calculation comparing the options. Example: On a US Dollars 200,000 loan at 6.5%, your first payment would have US Dollars 1,083.33 going to interest. At a rate of 6.25%, US Dollars 1,041.67 goes to interest. The difference is roughly US Dollars 40. If you were to pay one point to lower the rate, it would cost you US Dollars 2,000. At US Dollars 40 per month, it would take fifty months to break even - a little over four years.

The break-even date has one more consideration. How much could you earn on the US Dollars 2,000 if you did not pay it as a point to buy down your loan? If you invested it in a successful stock, you would make much more than you would save on the buydown. However, you could also lose some of it. Example: If you took the US Dollars 2,000 and put it in a CD at 3% interest, compounded monthly for four years, it would pay US Dollars 254.66 in interest. If this is the rate available to you, your break-even date now has to be extended for roughly an additional 6.5 months, figuring your savings at US Dollars 40 per month.

Do not be afraid to use rough figures and numbers in your head or with pencil and paper. Since each of these situations involves some level of uncertainty, you want to be able to throw out the obviously bad options without wasting a lot of time. If you are not sure of your numbers, ask the lender or broker to figure out the break-even time for you once you are down to those loans that you will seriously consider.

Once you know the break-even date, you simply have to determine what the chances are that you will keep the loan that long. If rates are falling, you do not want to buy down. You are probably going to refinance before the break-even date. If you believe rates are going to rise, it would be beneficial to keep the loan. Now your consideration turns to another decision. Will you sell the home before the break-even date? Things to consider are a possible job transfer, increasing family size, school changes, and so on. There are many reasons why you may move. You can only make an educated guess as to whether you will before the break-even date.

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