Should I Worry About the Rate or Closing Costs?

Should I Worry About the Rate or Closing Costs?
Sammamish Mortgage
Post Date: Updated:

When you’re buying a home, it’s normal to have the down payment at the front of your mind as far as costs are concerned. However, your interest rate and closing costs can also have a financial impact. Here’s what you should be worrying about when it comes to your rate and closing costs.

Your Interest Rate

The interest rate you get will have a significant impact on your overall loan costs for the term of the loan. If you plan to sell or refinance in a few years, your interest rate may not seem so important, but keep in mind that the bulk of your mortgage payment for the first decade or so of your loan term goes directly to interest charges.

If you sell the home after just five years, you’ll have paid in mostly interest and you’ll still owe most of the principal on the loan. You won’t have very much equity. If you keep the house and pay off the loan completely, however, just that one percent in interest could add up to $30,000 or more on a 30 year loan term and a $160,000 loan.

Your Closing Costs

Negotiating your closing costs can help you walk away from your home purchase with more in your pocket. You can attempt to get your lender to cover some of the closing costs, or negotiate with the home seller to bring some money to the table.

If neither of those scenarios is possible, you’ll need to plan for closing costs for the very beginning. Ask your Loan Officer (LO) what your estimated closing costs will be, and set enough money aside before calculating your maximum possible down payment. You don’t want to show up at closing short on cash. The vast majority of loan programs will have multiple rate and cost options to choose from including options to buy down to a lower rate using discount points or opting to get a lender credit in exchange for a slightly higher rate to limit the costs due at closing.

Remember that the earnest money you put in escrow will be applied towards your down payment and closing costs, so keep that in mind when you are doing your calculations. Overall, you can expect your closing costs to amount to somewhere in the neighborhood of 2% to 4% of your purchase price including prepaid items for property taxes and homeowners insurance.

The best way to approach a home loan is to have all the facts before making a commitment that could last for decades. Make sure you carefully consider your cash on hand and make sure you have enough for your down payment and closing costs. Then get the best interest rate you can, even if it means buying some points (if you plan to keep the home long term.) Using a pricing engine that breaks down all the rate and cost options available to you based on your specific situation like our Interest Rate Quote Tool combined with guidance from a Loan Officer is a great way to select the best option for you.

If you follow these guidelines, you won’t have to worry about your interest rates or closing costs, because you’ll have already created a plan to minimize their impact on your finances.

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