The Bridgewaters, Massachusetts

Looking Back

Interest rates rose last week as traders sold off some gains of recent weeks. Jobless claims were also up last week as layoffs accelerated, especially in the auto industry.

In other news, Construction Spending fell again in May, but by a slightly smaller margin than was predicted. Overall, residential construction spending is down 27.3% over the last 12 months.

Looking Forward

The most important financial data this week will come from several Fed officials who will be speaking on future economic conditions.  Fed Chairman Bernanke is slated for Tuesday when he will be talking about mortgage lending.

A Higher Rate That Costs Less Per Month

I always tell my customers "You will never write a check for an interest rate in your life!"  Buyers are too reliant on the pre-conceived notion that the lower the interest rate, the lower the payment. This is not always so.

When you buy a home and put less than 20% down, how your mortgage insurance is structured can make a big difference in how much the monthly check is written for.  

For example: a borrower is buying a house for $300,000, and wants to put 5% down. He is pre-approved with a competent lender for a $285,000 mortgage for 30 years at 6.50% with standard PMI. Their mortgage payment with monthly mortgage insurance premium is $2024/month ($1801/mo for principal and interest, and $223/mo for PMI). 

This same borrower could finance their PMI with the lender in exchange for a higher rate.  By taking the same loan at 6.875% with LPMI (Lender Paid Mortgage Insurance), the borrower's monthly mortgage payment is lowered to $1872/month. (a savings of $152/mo, $1,824 a year, and $9,120 over 5 years!).  

While some people may point out that over 30 years the higher rate would cost more, I counter that most people will refinance their current mortgage or sell their current home and buy another in 4 - 7 years. I also find that most buyers are more concerned with the monthly bill and are thrilled to save one full mortgage payment every year.