(LoanSafe.org) – Comparing mortgage loans among various lenders is often times a difficult task for borrowers who may not be familiar with the mortgage industry. While shopping, it’s essential to look up all the factors that a loan consists of, not just the interest rates. Closing costs, the quoted rate and points will all affect the true cost of the loan.
Points are a certain fee paid by the borrower at closing, but are not part of the mandatory closing costs. The function of points is to lower the interest rate of a loan. Each point is equivalent to 1% of the loan amount. Point plans are often available among different lenders, so it’s important to compare what each lender is offering.
Most borrowers will need to decide one of two things when considering purchasing points. Do you want to buy more points in exchange for a lower rate? Or pay less upfront and obtain a higher rate?
To make this decision you need to determine; (1) whether or not it’s feasible to pay the extra costs at closing; (2) the amount of time you plan on remaining in the property. If you plan on living in the home for a long period of time, purchasing points can be very beneficial as you’ll save money yearly by obtaining a lower rate.
Virtually all mortgage loans will carry a list of closing fees, which may include loan origination fees, discount points, appraisal, survey, underwriting fees, title and escrow charges, government recording and transfer charges. Closing costs often will add thousands more to the actual cost of the loan, another reason to shop around and compare what each lender is offering. The fees that lenders charge to process, approve and make the mortgage loan must especially be looked at. Generally, closing fees can account for 2 1/2 – 4% of the sales price. Additional fees could be charged by a third-party and may not be as transparent before closing. Keep in mind that buyers can request that the Seller pays some of the costs, or you may be able to negotiate a higher interest rate in exchange for less money upfront.
Additional Mortgage Details to Consider
All loan features should be investigated when shopping around. Mortgage insurance, maximum LTV, credit and cash reserve requirements, and qualifying ratios are just some basic factors that may influence the true cost of the loan. The presence of prepayment penalties and certain conversion options must also be reviewed.
Borrowers will also want to determine the lock-in period that each lender is offering. This is the period of time that the lender “guarantees” the interest rate and points quoted. Most lenders will offer a 30-60 day lock-in period, but could be as little as 15 days. Generally, the longer the lock-in, the higher the cost of financing.
Interest rates are typically the first factor borrowers will look into when deciding a loan. Being one of the most common aspects of a mortgage (or any consumer loan), borrowers often focus on this one thing, often forgetting about all the other costs associated with the account. While it’s recommend to lock-in at a low rate, you just never know if the rate will be lower the next day. This makes the rate deciding process a gamble, but other factors such as the lock-in period coincide with the rate.