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 "lowest rate around" message.
Too many unsuspecting home loan shoppers use these messages as the only criteria before choosing 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!
Consider the total cost
When you evaluate home loans, you need to take into consideration the closing costs, which are additional charges on top of the list price. Typically these charges can add up to 2% (or more) of the loan. For example, a $200,000 loan could results in $4,000 in closing costs ($200,000 x .02 = $4,000). And these charges can vary from lender to lender so it's important to understand all costs involved before signing on the dotted line.
- 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”, these 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 anywhere between .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 to determine the value of the home you want to buy. The lender uses this appraisal result to determine how much they can lend you.
- Title fees - The costs associated with producing a property title, the legal document identifying who owns a piece of property. 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 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 the interest rate for which you can qualify.
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 upfront cost with the savings in interest 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, this number represents not only the interest rate but also the points, fees, and other charges that will be rolled into the mortgage. The APR can be used to compare loan offers and costs.
The best strategy
The best move you can make is to find a lender that will work well with you so you understand all the options and pick the right loan for your unique situation. Chat with the lender's home loan consultant and ask yourself: Do you feel pressured? Do you feel rushed? Is it hard to get a full explanation? If you have a negative experience, it’s a good idea to have some more conversations to ensure you find the best lending partner for you.
If you’re ready to learn more, check out our short video on what you need to know before buying a home. If you have a question, give us a shout. Starting with a conversation is the first step toward becoming the boss of borrowing.
