Interest Rate Advice

[Amir B.]

Hello BP Community,

I am shopping around for a duplex and wanted some input on selecting the best rate for me.

I'm going the FHA route. I have gotten an interest rate offer at 2.875% no credit back, 3.100% $2,000 back, and 3.25% with $7,500 credit back.

Of Course the lower interest rate increases my loan amount and monthly payments.

Not sure what others are doing in my situation. My goal is to have less come out of my pocket.

Thank you. 

[Charlie Fitzgerald]

Actually, the lower interest rate has no bearing on your loan amount if you pay cash for your closing costs and the lower interest rate lowers your monthly payment.  I would take the lower rate.  The trouble with Lender Credit is that people forget that the higher rate given in return for the small amount of lender credit towards costs, is applied to the entire loan amount...NOT, just the portion of lender credit, over the life of the loan.  I call it stupid tax.  Let's say you are borrowing $200,000 (Purchase price and all closing costs combined),  at 2.875% with no lender credit, your annualized interest is $5750 per year (2.875% x 200k).  At 3.25% and a loan amount of $192,500, ($200,000 - $7500 in Lender Credit towards closing costs, assuming no other costs) your annualized interest is $6256.50.  That's $506.50 per year MORE.  Yes, you say...but I saved $7500 in closing costs!  Really?  2.875% on $200,000 for 30 years (that's what your signing up for) = $172,500 in interest.  3.25% on $192,500 for 30 years = $187,695 in interest.  $187,695-$172,500 = $15,195 MORE interest paid by you...that's the amount of Stupid Tax.

Lower rate...always.  The only one that makes money on Lender Credit is the Lender...otherwise...it would not exist and would go the same way as the "free toaster" you used to get when you opened an account at a bank.

Hope this helps.