How do you get the best mortgage deals as a first-time Boston condo buyers? We have the answers here.
As you heard in the news Boston condo mortgage interest rates are going up and it will make it much more expensive to buy a downtown Boston condo for sale in 2022. You cannot compare a 14% credit card with a 5% mortgage. Thankfully, we haven’t had 14% mortgage rates since the early 1980s when inflation was terrible. But any increase in mortgage rates is a big deal when buying a Boston condo for sale.
The reason there is so much difference between credit card and mortgage interest rates is that the credit card loan is a much higher risk. If you stop paying your credit card bill, no one is going to take the shirt off your back that you bought with the credit card. Credit card loans are unsecured loans. The only guarantee that you’ll repay the money is your signature when you make the purchase. You pay high interest on credit cards because the lender is taking a much bigger risk than with a mortgage that is secured by the home you live in. A mortgage is secured by your home. If you miss too many mortgage payments, the lender will take your home away in foreclosure to sell it and recover their money. Less risk for the lender means they can charge lower interest and stay in business.
okay, let’s look at why a small increase in the interest for a mortgage impacts your Boston condo for sale option. A few months ago, mortgage rates were about 2.8%. On a $250,000 mortgage for 30 years, the monthly payment would be $1,027 (not including taxes and insurance). At 5%, the monthly payment would be $1,342. That is a $315 increase in the monthly payment. If you stay in the Boston condo for 10 years, the higher interest rate will cost you an extra $37,800. That $315 a month is a big deal that can prevent many first-time buyers from qualifying for a mortgage on a Boston condo for sale you wanted. Compare it to a credit card with a $15,000 balance that goes up from 14% to 16%. The credit card monthly payment goes up from about $177 to $201. Most people can afford the extra $24 a month for the credit card much easier than the $315 increase for the mortgage. It’s about both the interest rate and the amount of money borrowed.
Now, how does a first-time Boston condo buyer find the best mortgage? This is where things get much more complicated because there are many variables. The basic process begins by asking questions like what type of mortgage is best for you? A 30-year fixed rate mortgage is the most common for first-time buyers. However, you should learn what else is available like adjustable rate mortgages (ARMs) that become more popular when interest rates are higher but are riskier for the homeowner because your monthly payments could go up in future years. The starting interest rate is often lower than a fixed rate to make it easier to qualify for a mortgage today. You’ll want to learn a lot more about ARMs before making this decision.
Another alternative to consider is paying points to discount the mortgage interest rate. Discount points are fees Boston condo borrowers pay to reduce the interest rate on their mortgages. One point is 1% of the loan amount, which typically reduces the mortgage rate by 0.25%. For example, one point on a $250,000 mortgage would cost you $2,500 to lower the interest rate from 5% to 4.75%. That $2,500 is in addition to your down payment and does not pay down the price of the house. It only pays for a lower interest rate so that your monthly payment is lower. It can take years for your lower monthly payment to recover the $2,500 you pay to lower the interest rate. The break-even period varies depending on the loan amount, the cost of the points, and the interest rate. It’s often seven to nine years. If you don’t plan to have the loan for that long, it’s a good idea to skip the discount points.
I hope that makes some sense to you and at least gives you a place to start asking questions. I think loan types like 30-year fixed and ARMs, along with discount points are basic places to start asking questions when interest rates are going up. However, many other variables could work better such as 20 or 15-year fixed rate mortgages. You will also want to learn about other options like FHA loans that can require as little as 3.5% down. You also want to know about other costs that come with a mortgage like property tax, homeowner insurance, and an HOA fee if your home is part of a homeowner association.
Also, don’t automatically accept the first mortgage preapproval offered without shopping around.
- Use online mortgage calculators to evaluate different down payments, interest rates, and other mortgage variables such as points.
- Don’t limit yourself to one type of lender like the national banks. Today’s mortgage market is competitive including sources you might not first think about.
- With a shortlist of lenders, go deeper into the details and variables. Points are usually stated as a percentage of the loan. Ask that points be stated as a dollar amount. Ask if closing costs can be wrapped into the loan. Read everything carefully to understand what you are being offered and what your options are.