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How to choose mortgage with different rates and costs

I am helping my Dad get a VA mortgage. The lender is quoting mortgages with different interest rates and closing costs. How do I help my Dad select the right mortgage? He is tight on funds so I may help pay his closing costs.

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

It is great that you are helping your father with the mortgage process. As you have learned, there is a trade-off between your mortgage rate and closing costs, with the higher your mortgage rate, the lower your closing costs, so your father needs to select the loan that best meets his financial profile.

Paying a higher mortgage rate reduces your closing costs which means you are required to pay less money up-front to get a mortgage, but you pay a higher monthly mortgage payment and more total interest expense over the life of the loan, which usually costs you more money in the long run. You can use our Mortgage Comparison Calculator to compare the difference in monthly mortgage payments and total interest expense for mortgages with different interest rates and closing costs.

For example, for a $285,000 30 year mortgage with a 3.875% interest rate, the monthly mortgage payment is $1,340 and you pay $197,465 in total interest expense over the life of the loan. For a $285,000 30 year mortgage with a 4.250% interest rate, the monthly mortgage payment is $1,402 and you pay $219,731 in total interest expense over the life of the loan. So the monthly payment for the mortgage with 4.250% rate is $62 higher and you pay $22,266 more in total interest expense over the life of the loan. On the other hand, in your father's case, the closing costs for the 3.875% mortgage are $2,600 as compared to a $2,500 credit for the 4.250% loan, so he is effectively paying $5,100 ($2,500 + $2,600 = $5,100) for the lower interest rate.

So what mortgage option makes the most sense for your father? That depends on his financial situation and how long he plans on living in the home. If he plans on living in the home for at least five or six years, paying the lower mortgage rate and higher closing costs usually makes more financial sense because you can recover the higher closing costs over a longer period of time (by making a lower monthly payment). If he plans on owning the home for a shorter period of time and paying off the loan within five or six years, then reducing your closing costs and paying the higher rate usually makes more financial sense.

In an ideal scenario you could pitch in and help him pay for all or part of his closing costs which reduces his out of pocket expenses for the mortgage and enables him to pay the lower monthly mortgage payment and total interest expense over the life of the loan, which should help him financially both in the short term and the long run.

Another option is for your father to apply for a closing cost assistance program. The VA does not offer any special programs to help applicants pay for mortgage closing costs but many HUD-approved local housing agencies offer Closing Cost Assistance Programs that can be combined with the VA Home Loan Program to help home buyers pay for all or part of their closing costs. We provide a comprehensive overview of Closing Cost Assistance Programs on FREEandCLEAR and you can contact your local housing agency to determine the home ownership assistance programs your father qualifies for. I have provided a link to the HUD web site where you can select your state and click "Learn About Home Ownership" to be directed to information about mortgage assistance programs in your state. Applying for a closing cost assistance program requires additional time and effort but can help financially-strapped borrowers afford a mortgage.

Finally, we always recommend that you shop multiple lenders to find the mortgage with the lowest rates and fees. You can review VA lenders in your area by clicking INTEREST RATES  We advise you to contact at least four lenders as comparing proposals is the best way to save money on your mortgage.

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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