Buyer learns the benefits of taking on a higher rate

Mortgage adviser: Liz Bayer. Property type: Vacation home in Plumas County. Appraised value: $320,000. Loan amount: $256,000. Loan type: 30-year fixed. Rate: 4.625 percent. APR: 4.625 percent. Backstory: Normally, one of the first questions a client asks is “What’s your rate?” as they are looking for the lowest rate.

However, sometimes it is beneficial to strategically take a higher rate.

Recently, a client planning to buy a second home approached Liz Bayer. The client wanted to put 20 percent down and get a mortgage for the rest of the balance.

The client intended to pay off the mortgage in a few months because she is expecting to inherit a substantial sum of money.

The rate with no points was 3.750 percent, however, Bayer recommended that she structure a higher rate of 4.625 percent that included a lender ‘credit’ that would defray most of the transaction’s closing costs.

Bayer provided a breakeven analysis to show the benefit of going with a higher monthly mortgage payment (over a limited period of time) that would save her more than $5,000 in net reduced costs.

The analysis clearly showed that it made no sense to pay closing costs out of pocket, when the lender credit could be used. Both the client and her financial adviser were in agreement that going with the higher rate made sense.

The lender credit that is built into a higher rate can be a good solution and should be part of the analysis.