Why lenders scream “best mortgage rates”. (And what else you should know about a home loan.)
We’re all suckers for a great deal. That’s why mortgage lenders will blast us with their low, low rate messages.
Too many unsuspecting home loan shoppers use this as the only way they choose a lender. The trouble is, that rate may not represent the best loan for your unique situation. In some cases, the lowest rate you see may not even be the best deal!
There are other costs to consider with that rate
When you are evaluating home loans, you need to take into consideration the closing costs. These are charges that are in addition to the price of the home you’re buying. It’s not unusual that these charges can add up to 2% (or more) of the loan. That could mean $4,000 in closing costs on a $200,000 loan ($200,000 x 2% = $4,000). And these costs can change from lender to lender. That’s why it’s smart to understand what the costs are in order to evaluate what kind of deal you’re getting.
- Loan origination fees - lenders typically charge a fee to make the loan. This is usually a percentage of the loan amount.
- Discount points - sometimes called simply “points”, they allow you to pay to reduce your interest rate. The cost of a point is 1% of the loan amount and can lower your interest rate from .125% to .25%. So if you need a $200,000 loan and the interest rate is 5%, it would cost you $2,000 ($200,000 x 1% = $2,000) to lower that interest rate to 4.875% (5% - .125% = 4.875%)
- Appraisal fees - the cost of hiring a professional appraiser to determine the value of the home you are looking to buy. The lender uses this appraisal to determine how much they can lend you.
- Title fees - the costs associated with producing the legal document with all the details of the property you are buying (called a “title”). This can include the title search fee and costs associated with issuing title insurance.
- Surveys - the cost of paying a survey company to create or update a map of the legal boundaries of the property you are buying and other details.
- Taxes - these can include the tax paid when the title transfers from the seller to you -– the buyer as well as any property taxes due within 60 days of the purchase date.
- Deed-recording fee - the fee usually paid to the county (where your new home is located) to register (record) the sale so it becomes a matter of public record.
- Credit report charges - the cost to pull your credit report(s) so the lender can determine what interest rate you can qualify for.
Should you pay points?
Paying points depends on your situation. If you’re planning on moving in a couple years, it may not make sense to pay for the points (because it will take a number of years to recoup that cost with the savings in interest you’re getting each month).
Check out this points calculator to see how long you would have to be in the home to make buying points a smart move.
How to compare deals
To make sure you’re comparing apples to apples, ask for the loan’s annual percentage rate or APR. The APR helps you understand the total cost. In other words, not only the interest rate you’re getting but also all the points, fees, and other charges that will be rolled into the mortgage. The APR helps you understand how the different deals stack up.
The best strategy
The best move you can make is to find a lender that will work with you to understand your options and find the loan that’s right for your unique situation. You’ll get a feel for this when you talk with a lender’s home loan consultant. Do you feel pressured? Do you feel rushed? Is it hard to get a full explanation? If you’re experiencing any of this, it’s probably a good idea to see what else is out there. It’s really the best way to ensure that you’re getting the best deal for your unique situation.
If you’re ready to learn more, check out our short video on what you need to know before buying a home. Or if just have a question, give us a shout. Starting with a simple conversation is a great first step to understanding how you can become the boss of borrowing.