Have you ever run across a home buying advice on Instagram or TikTok or somewhere online? And you've thought, is that really the best option? I ran across this video on Instagram. And I wanted to kind of walk through a little bit, so you can start to see what's the best way to evaluate some of the advice that you may see online.
Now, just a heads up, I don't think it's really important for us to necessarily go through and I criticize the way that they are presenting information because it's not necessarily bad or I think malicious in a way it's just incomplete and I understand that in videos like you need to make on TikTok or Instagram, you need to be a little bit shorter.
Also, I'm sure there are videos that I have where the whole picture isn't presented, just because of my own error. So I really just want to use this as a teaching example, to show you how other loan officers talk online. How do they present information and how can that sometimes be maybe not the best thing for you moving forward. So here's what he said in the video.
He said, "It's actually not as much as the thing. So if you want to buy a $400,000 house, you could put 3% down. That's a conventional loan. That's $12,000. You have another $6,000 of closing costs, but we can actually cover those with the rate. So all you need to buy, that's $12,000.".
The pretty simplistic idea of buying a house. So the question is how much money do I need to buy a $400,000 home? And he's basically saying, okay, 3% down. Absolutely true. If you're a first-time homebuyer on a conventional loan, the minimum is 3% down. Then he's saying. So that's $12,000, then $6,000 in closing costs.
Now, this is a really rough estimate. Closing costs are really difficult to estimate because they depend on where you're at the lender that you choose can impact your closing costs, the insurance that you have impacts your closing costs, and the title company you have. If you have transfer taxes in your state, what your property taxes are like, those all are going to impact what your closing costs are going to be 6,000 probably is a little bit on the low end in what I have seen. It could be very true for you. So 6,000, is just a completely rough estimate. He throws in this really quick thing that says, Hey, closing costs. Just throw them out. We'll cover it with a rate, no big deal. It's only going to cost you $12,000 to buy a house.
And again, I understand this is a short video and it's just to illustrate how this works. But what he's talking about is the fact that you aren't just given one interest rate. You actually have an option of multiple different interest rates when you get approved for a loan.
A loan officer normally is going to say, Hey, you were approved for X, you were approved for 4.75%. You can actually choose your interest rate though. Okay. So interest rates are given on a kind of a scale. So there is a bottom and a top. I know that about flipping them up. That's the way they look on a sheet when they're given to a loan officer.
So the way this works is let's say a loan officer says your interest rate is 5%. That would be with zero points attached to a zero cost that you have to pay for that rate. However, you can actually ask for a lower rate, maybe a 4.875%, but then you would pay, but think of it like prepaid interest, you pay money upfront to get a lower rate. And the opposite is true. You can get a higher rate, maybe a 4.125%, but then the lender gives you a credit. And this is often referred to as a lender credit that you may have heard of.
So what are you saying here is, okay. You could get a rate, but we could get a higher rate and we could get a higher interest rate. Then you'll get money back towards your closing costs. And the opposite is true. You could get a lower rate and increase your closing costs and the lower rate obviously it's going to help you save more money on interest in the future.
The reason this is just incomplete though is because sometimes I see a lot of marketing from realtors and loan officers, and it seems like the baseline goal, all they care about is marketing. How do we get you into a home and not considering the long-term impact of some of these decisions?
Because, okay, great. What I'd like to have is not had to pay $6,000 in closing costs, sure. But what is the impact of that? Long-term is that really a good decision to take a higher interest rate, to just get $6,000 shaved off of my closing costs?
I created a tool that is designed to help you compare these types of scenarios. I call it the LoanClarity Advisor.
So let's compare a scenario. Let's say we're looking at a $450,000 purchase price, which is fairly common in the US, feel free to use this tool to change us and tailor it however you'd like. So we're going to use this.
We're going to just use some basic estimates in the state of Ohio, change this to whatever you would like for your state. Let's compare two loan options. One with no points and one with a credit I'm going to even put this in $6,000 credit. Both of them are conventional loans. Let's say we're doing 3% because that's what he used in his example. And even for clarity, we can just do, let's just do exactly what he did. Let's do $400,000 home. That's going to be a lot easier to compare, so 3% down for 30 years. If we got no points, we probably could get around a 4.75% interest rate. Note that this is just an educational example. This is not me offering any interest rate to you.
If we got a $6,000 credit, likely the interest rate would be around 5.25%. Zero points over here. So we paid nothing for the interest rate over here. We got a credit, we got a $6,000 credit. This reduced our closing cost by $6,000.
So things like the appraisal fee, title fees, taxes, and insurance can be reduced by this credit. That means, if our closing costs were $6,000, then we wouldn't pay any closing costs. If our closing costs were more than $6,000, let's say closing costs in total we're $10,000 and we've got a 6,000 on our credit. We would still be responsible for $4,000 in closing costs. It's put average mortgage insurance and take a look at this.
So let's say we're looking over 10 years. This is the average time that somebody is in a home. Obviously the best option is going to be the no points loan. And it's going to save us $14,000 over 10 years.
We look at this over five years, it saves us three $3,600 zoom out. So we can see this chart a little bit more. And so we can see this break-even point hits right around year three. So taking the credit is only beneficial. If we're going to hold onto this loan for three years, the minute that it becomes longer than this is when it actually starts costing us a lot more money. So if you're going to hold on to this loan for, let's say six years, which is pretty average for most people. Normally they're going to refinance every six on average and stay in a home every 10 years or stay in a home on average for 10 years.
But if you're staying on a loan on average for six years, This strategy, even though it gave you $6,000 upfront, actually in the end costs you $5,000. And of course, if you hold on to that long, that's 10 years, it costs you $14,000. If you hold on to it for 15 years, it costs you $22,000, just because you got the $6,000 credit upfront.
Now we can also look at the monthly payment as well. So if we're looking at year one, the monthly payment is $119 different. If we're looking at year five, and year 10, it's the same thing. It looks like it doesn't really change that much over, over the term.
So what you really need to do, first of all, to be able to compare these you need to talk to a loan officer to see what kind of interest rate you could get and what kind of credit would be offered there.
And this really is a good thing to look at when you are getting approved for a loan is considering, what kind of options do I have with my interest rate? Could it help me save some money?
But ultimately, when you see things online like this, or when you're comparing mortgage quotes, you really want to make sure that you understand the long-term impact of some of these decisions.
Or I don't think this advice is necessarily bad. It's just incomplete. We can look at both sides. We can look at paying points, paying money upfront to get a lower interest rate, and what kind of savings would be great and the opposite. Getting a higher interest rate and getting credit towards our closing.
We just have to make sure is this something that fits into the long-term plan because so much in the real estate marketing world is around, how do I get you into a home as quickly as possible and as friction-free as possible. And so we see a lot of at least I see a lot of marketing that just is oriented around. How do you pay the least amount upfront when that has long-term consequences?
Now on the flip side of this, I am hesitant to say that too, because with what's happening in the housing market in general, with home prices increasing and it getting more difficult to save for a down payment. I also understand that sometimes you need to be able to have easier access to get into a home as it gets more and more difficult.
Because for instance, two years, If you were looking at buying two years ago and you still didn't have the money saved that you needed to. And you said, we're going to wait a couple of years to save more money. So we can qualify for a home. You missed out on a lot of appreciation.
And so really when it comes down to making these decisions for yourself and your family, what's going to be the best decision for you moving forward. There is no right answer, unfortunately, that doesn't exist. I know we all want to have someone that just tells me the right answer. What's the right thing to do.
Ultimately, what is going to come down to is you being able to put all the numbers in front of you, take a look at them, make sure that you understand how loans are working, how these numbers are working, what happens when you change the interest rate? What happens when you change the down payment? What happens if you bid $10,000 over what you thought you were going to buy a home for.
Understand these long-term impacts and the short-term impacts, consider everything in front of you as much as you can. Then you're going to be able to make a better decision moving forward having all of those numbers, rather than someone just saying, here's what you should do, and then you find out the effects of that after you purchased a home five years later, and then they can, oh man, that's not really what I wanted to do.
Home buying is really just an exercise in trying to get as much information as we possibly can in front of us. That way we can make a better decision about it moving forward.