EchoBay Expert: My wife and I will be living in the home we will be purchasing for only 6 years. How can we calculate whether getting a loan with the best mortgage rate or a loan with the lowest closing costs makes the most sense?
Loyal Reader: The calculation is actually quite simple. Let's assume that the best mortgage rate loan has a payment of $750 and $4,500 in closing costs and the lowest closing costs loan has a payment of $865 and $1,500 in closing costs. You will need to calculate your total outlay over the six years you plan to stay in the home. For the best mortgage rate loan, your total outlay is $58,500 ($750*72 + $4,500).
For the low closing costs loan, your total outlay is $63,780 ($865*72 + $1,500). If you stay in the house for six years, your best option is the best mortgage rates loan.
Another option is to calculate the breakeven point. The difference in payments is $115 and the difference in closing costs is $3,000. To find the breakeven point, divide the additional closing costs by the savings in payment ($3,000/$115). This equals 26 months.
What this means is that you must stay in the house for at least 26 months to recoup the higher closing costs. After that point, the best loan is the one with the lower mortgage rate. If you were going to be in the house for less than 26 months, you would be better off financially with the higher interest rate and lower closing costs.