A mortgage question about the best use of money.
Question: I have $5,000 more than required to put down on my new purchase. Should I use it for a lower loan amount or a lower rate?
Answer: This is why you need an experienced loan officer. The answer has some questions needed from you.
1- If the extra $5,000 puts you in a new level of mortgage Insurance rates: put it to the down payment. To explain: there are brackets that have an impact on the percent you pay for mortgage insurance: 3% down, 5% down, 15% down, and 20% down. Moving to a higher bracket is significant.
2- Sometimes you should do neither and leave it in reserves. Both from an underwriting perspective and from a prudent perspective having money in reserve is a priority. If you have reserves, ok, use the money honey.
3- If you plan on selling or refinancing in 48 to 72 months: put it to the down payment. Why? Depending on the day, lender, rate, and program the break even point is usually within this time period. Always have your trusty loan officer show you the break even point.
4- If you expect to keep the loan longer than the break even point, put it to the rate. This surprises some people. Here are the numbers. $250,000 loan: 6.25% interest: 30 year mortgage: a $5,000 reduction of loan amount saves you a whopping $25.44 per month. That same $5,000 going to buy a lower rate (points) would save $60.35 per month. (Again this number will vary from day to day, lender to lender, etc. The concept is the point here, the exact numbers you should speak to your lender about.
Larry Cragun
