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Should I Always Finance a Property with the Lowest Interest Rate Loan?

If you are like the average home buyer, you will be depending on a mortgage loan to finance the purchase of your new home. Given the fact that purchasing a home will likely be the single biggest purchase you make in your lifetime, it only seems appropriate to know as much about the financing process as possible before committing to a lender and/or loan. Unfortunately, first-time home buyers often make costly mistakes because they fail to do the proper research and ask the right questions before starting the home search. For example, should you always finance a property with the lowest interest rate loan? Contrary to what you may assume, the answer to that question is “no.”

Even if you have never taken out a mortgage loan before, you have undoubtedly heard people discussing “mortgage rates,” referring to the current average interest rate for mortgage loans. This may have led you to believe that the interest rate you are offered is the only important factor when shopping for a mortgage loan. While the interest rate on your loan is certainly important, it is only one of several important factors that should be considered when deciding what mortgage loan is best for you. Moreover, it is not always best to take the loan offer with the lowest interest rate.

Why wouldn’t you want to take the loan with the lowest interest rate? There are several potential reasons, all of which boil down to the fact that the interest rate is not the only factor that determines your monthly mortgage payment, nor is it the only factor that determines how much the loan will ultimately cost you. Consider some of the other factors and how they can impact your loan:

  • Fixed vs. adjustable rate – mortgage loans come in two basic types: fixed and adjustable rate (ARM). Although fixed-rate loans tend to have a higher interest rate, the rate will not change over the life of the loan. With an ARM, the initial interest rate is often significantly lower than a fixed rate loan; however, because the rate fluctuates over the life of the loan, it can end up being significantly higher just a few years into the loan than its fixed rate counterpart.
  • FHA vs. conventional – although FHA loans often offer a lower interest rate than conventional financing, conventional financing is much more flexible. Furthermore, if you are able to put down a significant down payment, you can often get a conventional loan at the same, or similar, rate.
  • PMI – low interest FHA loans usually require a sizeable upfront mortgage premium as well as a monthly premium that can substantially increase your monthly payment as well as the overall cost of the loan.

Before you assume that a lower interest rate mortgage loan is your best option, be sure to consult with an experienced Pennsylvania real estate attorney. Contact the real estate law attorneys at Curley & Rothman, LLC by calling 610-834-8819 today to schedule your free consultation.