When people find out what I do for a living, the number one question they ask me is “What are interest rates?” The mortgage rate question seems to be ingrained in our minds and it might be because everywhere you look for home loan information you get advertised interest rates. Go ahead and Google “30 year fixed mortgage”. The entire first page of results gives you interest rate information. Did you notice the word “rate” was not included in my search phrase?
According to a 2017 article by Forbes, digital marketing experts estimate that most Americans are exposed to around 4,000 – 10,000 ads each day. We can’t help it. The interest rate question is rooted in our minds by marketing companies. With that kind of power, no wonder we are trained to ask this question.
Although interest rate is important, there are some other questions that are more important to ask when looking for home financing. Let me give you an example of why interest rate shouldn’t be your first question. I had a customer call me and explained he was shopping around for the lowest rate on a 30-year fixed VA loan for a refinance he wanted to do. I told him I’d be happy to give him that information, but I wanted to ask him a few questions first about what he was trying to accomplish from the financing and what his goals were with the property. Through conversation, I discovered that his goals were not to get the lowest rate but rather were the following:
· Due to a divorce, he needed to pay off his ex-wife
· Pay off additional debt
· Have two options five years into the future – sell or rent out the home
After learning these goals, I showed him multiple loan options that matched his objectives, including the 30 year fixed rate VA loan he originally asked for. The VA loan had the lowest interest rate of all the other loan programs, but when we compared them side by side with the total costs he’d incur during his 5-year goal term, he realized the VA loan was going to cost him thousands of dollars more than the other higher interest rate programs. He ended up choosing a conventional 30-year fixed loan product. Although it had a higher interest rate, it was going to save him over $13,000 compared to that lower rate VA loan! It also gave him the safety of the long term fixed loan in case he held onto the home as a rental and would free up his eligibility to use his VA loan again with a future purchase. I call that a win, win, win!
I hope this example demonstrates why interest rate should not be your first question. I suggest the following questions in this order when looking at home loan options.
1. What are all the available loan products that fit my goals?
2. What are the total costs of these products over my goal term?
3. Once you pick your product from question 2 – What are the interest rate options and costs associated with those rates on the product?
Real Estate is normally an individual(s) largest asset and largest debt. It deserves a more in-depth discussion then asking for interest rates on a loan product you think you should have. Asking a bank for their mortgage interest rates is like going to a car dealership and asking for the price of their generic blue vehicle. Bank’s advertising rates on a 30-year fixed mortgage is like that dealership giving you the price of a blue pickup truck. There are hundreds of loan programs and products available, just like there are many different cars with a variety of different options and packages to choose from. In fact, there are multiple, and very different, 30 year fixed loan programs. Without finding out your needs and then seeing all options that fit your goals, you’re walking away from the bank with a blue pickup truck/SUV/sedan/sports car/compact/luxury car/utility vehicle hoping it does what you needed it to do without costing you a small fortune.
About the Author:
Sarah Lindsey (Home Loan Gal) is a mortgage adviser with over 13 years of industry experience. Her core values are based on one simple approach – provide clients with trusted expertise, personalized information, specific to their needs. Sarah currently serves as a Vice President with Synergy One Lending, is a regular guest on the television show, The American Dream with Craig Sewing, is a resource partner for the San Diego Chapter of the Financial Planner’s Association, is a board member for Junior Achievement (a non-profit focused on bringing financial education to all school age children) and can be heard on the radio station AM 1170 advocating consumer awareness on financing.