What makes a good mortgage deal? It’s not always the lowest price or the lowest interest rate. Here’s what homebuyers should look at before deciding.
You found a house you like. The price looks good. The neighborhood works. Maybe the builder is offering an attractive incentive or the seller is willing to contribute toward your closing costs.
It looks like a good deal.
But is it?
It’s a mistake to focus on one number instead of looking at the entire transaction.
The purchase price matters. The interest rate matters. Closing costs matter. The amount of money you need to bring to closing matters.
But these numbers don’t exist independently.
The house isn’t necessarily the deal. The terms are.
A Lower Price Doesn’t Always Mean a Better Deal
Let’s say you’re comparing two homes.
One is priced at $400,000. The other is $415,000.
At first glance, the $400,000 home appears to be the better deal.
But what if the $415,000 home comes with a significant seller or builder contribution that can be used toward eligible closing costs or a rate buydown?
Now the comparison isn’t simply $400,000 versus $415,000.
You’re looking at two completely different financing scenarios.
This is why I encourage buyers to look beyond the purchase price and consider the entire cost and structure of the transaction.
The Interest Rate Is Important — But It’s Not the Whole Story
It’s understandable that buyers pay close attention to mortgage rates. Your interest rate affects your monthly principal and interest payment and the amount of interest you’ll pay over the life of the loan.
But there’s an important question to ask when someone presents you with a very attractive rate:
What does it cost to get that rate?
A lower interest rate may involve discount points or other costs. A builder or seller may also offer money toward a rate buydown as part of the transaction.
That doesn’t automatically make one option better than another. It means you need to compare the numbers.
Sometimes paying additional upfront costs for a lower rate can make sense for a particular buyer. Other times, keeping more cash available at closing may be more important.
The right question isn’t simply, “What’s the lowest rate?”
It’s:
“What combination of rate, costs, payment and cash to close makes the most sense for me?”
Don’t Overlook Seller or Builder Contributions
This is another area where the advertised price doesn’t tell the whole story.
A seller or builder may offer a credit that can potentially help with certain closing costs, prepaid expenses or an interest-rate buydown, depending on the loan program and transaction.
That can change the economics of the purchase.
For example, imagine a $400,000 home where the seller agrees to contribute $10,000 toward eligible costs.
The home didn’t suddenly become a $390,000 house.
But that $10,000 contribution could reduce the amount of your own money needed for certain costs at closing or be used toward an eligible financing strategy.
That’s a very different conversation than simply negotiating the purchase price.
This is also why it’s important to understand the rules associated with your particular loan program before assuming a seller or builder credit can be used any way you want.
Look at Cash to Close
Here’s a number I wish more buyers focused on earlier:
How much money will I need to bring to closing?
Your down payment is only one part of the equation.
Depending on the transaction, you may also have:
- Closing costs
- Prepaid interest
- Property taxes
- Homeowners insurance
- Escrow funding
- Discount points
- Other loan or transaction-related costs
Then you may have seller or builder contributions that reduce certain eligible expenses.
That’s why two homes with similar purchase prices can result in very different amounts of money needed at closing.
For many buyers, cash to close can be just as important as the purchase price.
Don’t Forget the Monthly Payment
The mortgage payment isn’t simply principal and interest.
Your total monthly housing expense can also include property taxes, homeowners insurance and, when applicable, mortgage insurance and HOA dues.
That’s why I encourage buyers to look at the complete monthly payment, not just the principal-and-interest payment being advertised.
A home that looks affordable based on the mortgage payment alone can look very different once the other costs are included.
And the opposite can also be true.
Sometimes a buyer assumes a particular home is out of reach based on the purchase price, only to discover that the financing structure, available credits and overall numbers make the transaction worth a closer look.
The Loan Program Matters, Too
The financing strategy can make a significant difference.
Conventional, FHA, VA, Jumbo and Bank Statement loans each have different guidelines, costs and eligibility requirements.
That’s one reason I don’t believe there is a single mortgage solution that is right for every buyer.
The goal isn’t simply to find a loan.
The goal is to find a loan structure that fits the buyer, the property and the transaction.
That means looking at more than the interest rate.
So What Makes a Good Mortgage Deal?
A good mortgage deal isn’t necessarily the house with the lowest purchase price.
And it isn’t necessarily the house with the lowest advertised interest rate.
It’s the transaction where you understand what you’re paying, what you’re receiving and what the financing will cost you.
Before making a decision, I recommend looking at:
Purchase price
What are you paying for the property?
Interest rate
What will your rate do to your monthly payment?
Closing costs
How much will the transaction cost beyond your down payment?
Seller or builder contributions
What costs can those funds legitimately help cover?
Cash to close
How much money will you need to bring to the closing table?
Monthly payment
What will your complete housing payment look like?
Loan structure
Is the loan program appropriate for your financial situation and the property?
When you put all of those pieces together, you get a much clearer picture of the deal.
Don’t Just Ask, “What’s the Rate?”
When you’re shopping for a mortgage, it’s easy to compare lenders by asking one question:
“What’s your rate?”
But that’s only one piece of the puzzle.
A better conversation is about the complete loan estimate and the costs associated with getting that rate.
That’s where an experienced mortgage professional can help you understand what you’re comparing.
And you don’t have to be an expert in mortgages to make an informed decision.
That’s my job.
My goal is to explain the numbers clearly, answer your questions and help you understand your options so you can make a decision based on the entire transaction, not just one number.
Look at the Whole Deal
The lowest price isn’t always the best deal. The lowest rate isn’t always the best deal.
The best way to evaluate a home purchase is to look at the entire picture; price, rate, closing costs, contributions, cash to close, monthly payment and loan structure.
Because when you’re buying a home, you’re not just buying the house.
You’re financing the terms of the deal.
If you’re buying a home in Magnolia, The Woodlands, Conroe, Spring, the greater Houston area or anywhere in Texas, I’m always happy to help you understand the numbers and your options, even if you ultimately decide to go in a different direction.
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Sal Trapani, Mortgage Banker & Owner, MJ Mortgage LLC, 281-608-2846 cell, sal@mjmortgagellc.com, www.mjmortgagellc.com, Magnolia, TX 77354, NMLS 1055510 / NMLS 2381195