Which is more important: mortgage rates or mortgage costs?
Mortgage fees: what impact on your rate?
One of the great mysteries of mortgage lending is mortgage charges. What are these costs – and are they of greater financial concern than mortgage rates?
If interest is the cost of leasing money over time, then what are the mortgage costs? It may seem like there is a simple list of typical fees – and there are – but if so, why don’t all borrowers pay the same fees? Fee checking is part of mortgage shopping.
See today’s mortgage rates and fees from different lenders (Jul 20, 2021)
These are fees for processing your loan application. The application fees can be reimbursed at closing or be part of the total costs of the loan. Starting a loan costs lenders money whether you take it out or not. So, some charge an application fee to cover at least part of their costs if you change lenders after the request. You will not get it back if you change lenders.
For this reason, it’s a good idea to shop around for rates and compare costs before committing to a lender and applying for a mortgage. If you don’t like the idea of a non-refundable application fee, choose a lender that doesn’t charge one.
Subscription / processing fees
A mortgage application can consist of hundreds of pages of documentation, much of which can now be obtained electronically by the lender with your approval. This material must be analyzed and verified for the loan to be approved. The sales charge represents the cost to the lender of processing the mortgage.
These fees are often included in a single origination charge. You might not see a separate line item for this.
When you lock in your interest rate for the standard 30-day period, it usually costs nothing. You can get a discount on the loan fee or interest rate if you lock in for seven or 15 days. However, the shorter lock won’t help you if you can’t close it before it expires.
For those who wish to lock in for longer periods, there is often an upfront fee. This is because the lender has to pay to tie up the money for an extended period and may lose if you don’t close. So, your upfront foreclosure fee is another non-refundable fee if you take your business elsewhere after you apply and get locked out.
One point is simply 1 percent of the loan amount. Original fees are often expressed in points. The norm is one point, but you can find loans with an origin of 0.5 point or other amounts.
Then there is discount points. By paying discount points, you benefit from a lower interest rate. For this reason, mortgage insiders call the point payment for a lower mortgage rate “to buy the rate down”.
Points of call are negotiable and may or may not be a bargain. One point is the money spent on closing. Once spent, the money is gone. There is no refund. Does it make sense to pay points? It depends on how long it will take to recover the cost.
Break-even point: points versus mortgage rate
Typically, one point should get you a rate reduction of 0.125% to 0.250% on a 30-year loan. If you take out a mortgage for $ 200,000, this is what it might look like:
- The principal and interest on a 4.5% zero cost loan is $ 1,113
- If you pay a point and get a 4.375% discount, your payout is around $ 999 and it will take you a little over 11 years to get the $ 2000 discount point back.
- But if you get a 0.25 reduction for that point of discount, your rate drops to 4.25%, your payment becomes $ 984, and the break-even period drops to just over 5 years.
So, the decision to pay points or not depends on how long you plan to hold the mortgage and whether there are better things you can do with your money, like paying off a high interest credit card or make a very profitable investment.
It is almost impossible to get a mortgage without some form of appraisal. The cost of a “full appraisal,” in which an appraiser personally visits the property, inspects it inside and out, and then compares it to recent sales in the neighborhood, has increased dramatically in recent years. . Expect to pay hundreds (or more for luxury properties).
Fortunately, many loans do not require full processing. Fannie Mae, for example, offers a “valuation waiver” for low-risk transactions. But its guidelines say most borrowers won’t get waivers. If one lender offers it and another doesn’t, that’s a consideration when you finance.
Instead of appraisals, lenders can use “automated appraisal models” or MAVs. An AVM program examines public records or real estate sales in your area and generates an estimated value
The general rule is that the lower your rate, the more you pay. So you’ll want to do a break-even analysis to see if it makes sense to pay more up front or pay more each month. If you plan to only hold your loan for a few years or aren’t sure how long you will hold it on, many experts recommend spending as little as possible upfront.
If you have a good interest rate, a long-term fixed loan, and plan to move within the next decade, it may be worth considering more expensive loans with lower interest rates. And if you need a certain rate and payment to qualify, you may need to pay more up front to secure it.
And by the way, it doesn’t matter if the lender calls your fees an origination fee, a processing fee, or a burger. The total fee is what you need to focus on. And if you want to make shopping easier, choose an interest rate and ask several lenders for estimates of your costs to get that rate. or decide what closing costs you want to pay and ask for the rate at that cost.
This makes it easier to compare rates and costs. You can also view the loan’s APR, which allows you to compare loans with different costs and rates.
Related: Don’t Rely On APR Alone When Shopping For A Mortgage
APR (annual percentage rate)
the Loan estimate The form shows two interest rates: the quoted rate, which the lender uses to calculate your mortgage payment, and the APR, or annual percentage rate. The APR incorporates the interest charges plus the costs of obtaining the loan. It then expresses this cost in an interest rate. The idea is that you can make a meaningful comparison more easily.
For example, this is what a single loan could look like at three different price points:
- Declared rate: 4.5%, fees: zero, APR: 4.5%
- Declared rate: 4.25%, fees: 2 points, APR: 4.417%
- Declared rate: 4.00%, fees: 4 points, APR: 4,583%
In this case, the loan at the lower rate has the higher APR. It will take a long time to recoup the cost of purchasing the rate up to 4 percent. The lowest APR loan is the second, the 2-point loan. But is it the best deal? Not if it takes too many years for the monthly savings from a lower payment to cover the higher upfront costs of paying points. As a general rule, if two loans have a similar APR, choose the one with the lowest costs.
As always, speak with loan officers, work out the numbers, and see which option is best for you.
Check your new rate (Jul 20, 2021)