A home loan is one of the major financial decisions one will make during their lifetime and it is important to make sure that you understand the terms of your home loan.

One of the most critical parts of your mortgage loan is your mortgage interest rate. Several people believe that the lowest interest rate is the most important part of a mortgage loan, but this is not always true. Interest rates and the associated closing cost play an important roll in the mortgage loan and both effect each other.

Home loans with the lower interest rates will have the most closing cost, but when closing cost decreases, the interest rate will rise. It is like a see-saw, when one side goes up, the other side goes down. This is due to the fact that to lower your interest rate you have to purchase a discount point. Discount points lower your interest rate usually by .125%-.25%.

If you take a higher home loan rate, you will receive a premium or a credit of cost that can lower your total closing cost. By taking a higher rate, the closing cost will be lower.

When shopping for a mortgage, it is crucial to find the balance between closing cost and interest rates. Here are some important questions you need to ask when determining the interest rate for your mortgage:

* How long will I keep the home loan or the property that I am purchasing?

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* How much money I will save over the lifetime of the loan?

These are important questions because not all home owners are in the same situation. If you plan on keeping your loan for a short time frame (2-5 years) it might be a better option to take a higher rate and reduce closing cost, but if you plan on keeping the mortgage for an extended amount of time, buying down the interest rate will be the best option.

Also, when purchasing a house, if the seller is paying for some of your closing cost, you can use the seller credit to help lower your interest rate by purchasing a discount point or just reduce the total amount of closing cost. Ultimately, the decision to buy down a lower rate should be based on how long you plan on keeping the loan.

Discuss all your options with your mortgage advisor today to see what option is best for you!

David White is a Sr. Mortgage Officer who specializes in home loans. He has over 12 years experience with Southlake home loans