While it is important for the consumer to shop around for the best interest rate, the lowest interest rate is not always the best. Lenders, like other companies, rely on competition and advertising for their business. Some banks and lending institutions will advertise a phenomenally low interest rate in order to attract prospective borrowers. The interest rate may be as much as a few points below what other lenders have offered. Consumers should be aware, however that this low interest rate may come with a high price tag. In order to makeup for the lost revenue of the low interest rate, lenders will include restrictions and penalties in the terms of the loan. Frequent restrictions included limiting the attractive low interest rate to only a portion of the entire length of the loan, such as one to three years. After that time period, the interest rate will rise to the current prime rate at the time. Another common restriction allows the lender to charge a penalty to the consumer should they decide to refinance the loan with another lender at a later point in time. The penalty is often so cumbersome it makes the savings of refinancing minimal.
Finally, lenders may try to make up the difference by requiring the consumer to purchase home insurance through them, rather than allowing them to shop around for competitive rates. Provided there are no requirements or penalties attached to a low interest rate, it can be quite advantageous for a consumer to shop around before making a final decision on a lender.
The prospective homebuyer will also need to make a decision between a 15 year mortgage and a 30 year mortgage. Both have advantages and disadvantages. With a 30 year mortgage, the consumer is tied down to a payment for a much longer length of time. The payments are often smaller, but only because they are being spread out over a shorter period of time. In addition, interest rates may be slightly higher with a 30 year mortgage because the lender is going to be at risk for longer.
15 year mortgage payments are almost always larger than 30 year mortgage payments, because the loan is being paid off in a shorter amount of time. While the monthly payment difference between a 15 year and a 30 year mortgage may not seem that substantial, when viewed in terms of long term, it becomes tremendously important. A 15 year mortgage at a low interest rate can amount to a huge difference in savings.
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