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Buying Your Interest Rate

Buy Downs and Buy Ups Can Solve Mortgage Troubles

Buy Downs and Buy Ups Can Solve Mortgage Troubles

Orange County, CA – A quick look at the markets indicates that mortgage interest rates have started the year poorly. 2013 has started out as a year of rate rises, with a rather large increase of 0.05% on 30 year fixed mortgages. Freddie Mac figures clearly indicate a change.

Right now, the average 30 year fixed rate mortgage has escalated to 3.40% across the nation at an average cost of 0.7 discount points. 0.7 discount points equals 0.7% of the loan amount. In real terms, this is significant. If an Orange County home buyer was seeking a loan of $417,000, they would have to pay $2,919.00 in discount points to obtain the stated 3.400% interest rate. This expense is in addition to the standard closing costs.

Paying discount points is called “buying down” the interest rate. Essentially you are pre-paying mortgage interest. The more you pay up-front, the less you pay every month. It’s like an advance paid against your mortgage. It’s a simple deal – the lenders effectively offer higher fees right now, with the promise of lower fees in the future.

This principle also works in reverse. Can’t cover all your closing expenses? You can “buy up” your interest rate. In exchange for a lump sum credit at closing you can opt for a higher interest rate. Whether buying up or buying down, it’s wise to consider the time that you plan on having the loan. A simple break even analysis can tell us how much you should “buy down” or “buy up” your interest rate.

The fact that Freddie Mac takes into account discount points is one of the main reasons why it often appears that their rates are lower than others. When see interest rates posted on the internet be sure to inquire about discount points. They may or may not be taken into account or being used at all.

All of this can be a little hard to fathom if you aren’t experienced in the market place. With this in mind, it is vital that you arm yourself before setting off into the mortgage wilderness, trying to snare yourself the right mortgage. Yes, it’s a great time to find your perfect home and yes, there’s rarely been a better time to borrow money. But it’s never a good idea to do so blind. Take advice from the mortgage professionals and make the right loan choice.

Scott Storace

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