The answer is usually no. Interest rates are indeed important, but not necessarily the most important factor when considering a mortgage loan. While it is generally true that a lower interest rate results in a lower payment, it is important to understand that it is not always true, and that there are several other factors that should be taken into consideration when selecting the mortgage loan that is right for you.

Unfortunately, many consumers focus too heavily on the interest rate because it represents the most easily identified aspect of price when it comes to a mortgage loan. This can open the door for less reputable lenders to take advantage of consumers who are too focused on the interest rate, and who may not appreciate the importance of other factors.

Paying "Points"

When considering a mortgage loan, one of the first questions you should answer is how much money you're willing to spend to secure the necessary financing. You can pay money up front in order to lower the interest rate. That process is called paying "discount points." These are the funds paid at closing to obtain a particular loan program and/or interest rate. One discount point equals one percent of the loan amount. Discount points may be paid by either the buyer or the seller.

Paying discount points generally allows for a lower interest rate. In effect, you can buy down the rate by paying money up front. Unfortunately, some consumers can be mislead by an offer of a very low interest rate when they either are not told, or do not understand, that the low rate requires payment of points. While this is certainly not limited to the Internet environment, it seems a common practice for Internet lenders to offer very low rates on their home page - rates that require points to be paid. This type of rate tactic is also used by lenders who advertise interest rates in local newspapers.

Fast Fact

Mortgage interest rates move up and down very much like the stock market. Rates can move on a moment to moment basis. There is absolutely no way for anyone to know how interest rates may change an hour from now, let alone a day or week from now.

Keep in mind that advertising generally requires production of materials and advance scheduling for placement of those materials. Those requirements mean days or weeks of planning and preparation.

It can be very beneficial to consider how a lender who advertises an interest rate today, for instance in today's newspaper, could have possibly known what the rates would be today - when that advertisement was produced days in advance.

While interest rates for consumer loans - such as an automobile loan - are more stable and predictable, mortgage interest rates move constantly. Therefore, we encourage a healthy level skepticism toward advertisements for mortgage loans that offer a specific rate. It's rather like a stock broker promising that a certain stock will be trading at a certain price - next week.

While the option to pay points is a legitimate and sometimes preferred practice, you should clearly understand what is required in order to obtain any specific interest rate or loan type. Be sure to inquire with your lender about any requirement of paying discount points. You may want to pay points, you may not.

How long do you intend to own the home?

This is another important question to answer before considering an interest rate. The length of time you plan to own the home will help determine the type of loan you choose, and thus, the corresponding interest rate(s) for that loan type.

For instance, if you intend to own the home for a short period of time, a 30 year fixed rate mortgage is probably not the right loan for you. However, when inquiring about interest rates, the 30 year fixed rate loan is the standard reference. In your situation, an adjustable rate loan or a loan with a balloon payment might best suit your needs. Therefore, information about 30 year fixed interest rate loans would be of virtually no use.

Loan type

As discussed under "How long do you intend to own the home?", there are many types of mortgage loans, each designed to fit unique borrower or property circumstances. Different loan types offer different interest rates. It is important to determine what type of loan best suits your unique needs prior to shopping for an interest rate. Keep in mind that a person who quotes an interest rate to you without first asking the questions listed here, is doing you a disservice.

Your credit

Mortgage lenders consider borrowers for mortgage loans based on criteria set by mortgage investors. Generally, the lender's decision is based on your credit history and your demonstrated willingness and ability to repay the loan.

People who have better credit qualify for more loan types and lower interest rates. People who have bad credit do not qualify for as many loan products and will generally pay higher interest rates. The reason for this is the lender's risk in providing funds with the expectation of repayment. Those who have proven a willingness and ability to repay are considered to be a lower risk. Those who have either not established credit, or who have not managed credit responsibly, are considered a greater risk.

It is to your benefit to manage your credit wisely. Your credit history plays a significant role in obtaining future credit. Due to the amount financed, this is generally more important when financing a home than at any other time. Thus, it makes sense for most consumers to meet with a lender to obtain pre qualification prior to looking for a home. You can save yourself a great deal of time and aggravation shopping for homes that are not in your price range (more or less than you can afford), or gathering interest rate information for loan products for which you may not qualify.

Market conditions affected by interest rates

Since 1993, the mortgage industry has become increasingly concerned about debt management. Refinance booms of 1993, 1997-98 and 2001 resulted in record numbers of consumers using home equity to restructure their finances. Since mortgage interest is generally deductible from federal income taxes, there exists a motivation to use home equity to offset consumer debt.

Lower interest rates also mean that more people can afford to buy homes. This is especially true for first time home buyers. Lower interest rates also provide motivation for current home owners to move into different housing to better meet their needs. Some people might need larger homes, others might need smaller homes.

In addition, Colorado real estate values have also soared in recent years. Therefore, an increasing number homeowners have discovered ways to pull equity (money) out of their homes to pay for improvements, investments, business capital, and other uses.

These factors play a significant role when interest rates move lower. Demand for mortgage financing can increase dramatically in a very short period of time. During such market conditions, simply obtaining a mortgage loan can become a more important factor than obtaining the lowest interest rate.

One consumer might lock in a rate well in advance of the loan closing so as to ensure that the closing takes place. Meanwhile, another consumer might wait for a lower rate, then find it impossible to schedule the loan closing due to an enormous demand. Keep in mind that a lower interest rate is meaningless if the loan does not close.

Market conditions affected by property values

When considering a mortgage loan, it pays to understand how property values are changing in your market. The more that property values are increasing, the less important a lower interest rate becomes. Waiting for a lower interest rate that might save a few dollars per month is counterproductive if property values are increasing by hundreds or thousands of dollars per month.

In a market where property values are increasing, and with the general simplicity of refinancing in today's market, it can often be less expensive in the long term to go ahead and buy the home when rates are higher, then refinance if and when rates move lower.

Conclusion

Keep in mind that all the questions offered herein should be taken into consideration when shopping for a mortgage loan. There is no "one size fits all" mortgage loan. Your personal mortgage financing needs are unique and should always be managed as such. What is right for someone else is not necessarily right for you. The best way to obtain the loan amount and loan program that is best suited to fit your needs is to consult with a professional mortgage loan originator who will get to know you and your specific needs.