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Investing in a home
A difference of a quarter of a percentage point can mean tens of thousands of dollars over the life of a loan. Whether you’re buying or refinancing, you should talk with at least 5 lending officers before settling on one.
What do I ask for?
The trick to negotiating well is to know exactly what you want and ask for the same loan from each lending officer. So, what do you want? You want a 30 year conventional with no points.
What rate can I get?
The graph below shows the latest 30 year conventional rates across the nation. The rates represent an average, and they are generally lower than what you would get with a zero point conventional loan (since the average homeowner “buys down” the rate with up-front fees called points). Because the rates in the graph below are averages based on points (typically one point), an above-average negotiator can typically lock in the average national rate without paying for points. This is the goal you should keep in mind as you’re shopping your loan.
Should I buy points?
Why does the average home buyer purchase points? Mortgage officers often argue that it makes good financial sense to buy points if you plan to remain in a home for more than 5 years. From a strict Discounted Cash Flow perspective, this is true, but DCF models don’t do a very good job of valuing options. In other words, don’t buy points.
How big a loan should I get?
Ideally, the entire cost of your house would be covered by the conventional loan, but if you must buy a house for more than the limit for conventional loans in your area, don’t get a jumbo loan. Instead, ask for a conventional and a second, 15-year fixed rate loan to cover the difference. That way, you’ll have the option to pay down the second loan (which will carry a higher interest rate), while retaining the low rate debt on your first. The only advantage that a jumbo loan has over two sets of loans is that, if the Federal Government raises the limit on conventional loans above what you owe on your jumbo, you may be able to refinance your jumbo loan at a lower rate than you could get if you consolidated your first and second. Currently, that difference is about half a percentage point. Unless your second is huge, though, you’re more likely to have paid it off entirely by the time this opportunity rolls around.
How much should I put down?
20%.
What if I can’t afford 20%?
If you really can’t afford to put down 20%, you have three viable options:
#3 may sound extreme, but it’s better to rob a bank than to let the bank rob you.
What if I’ve already locked in my rate? Time to chill?
No. Once you’ve locked in a rate (typically 60-90 days before closing), come back to this page often, comparing the graph above with the news listings below. If rates appear to be moving south, start shopping around again. If you can secure a better rate from another lender, you can back out of your first (don’t worry, your banker won’t cry). You might have to pay a few hundred dollars to cover the additional application fee, but this is peanuts compared with what you’ll save with a lower rate.
Happy hunting! …and leave a comment at the bottom of this page if you have questions you’d like me to answer directly.