Best Interest Rate or Lowest Closing Costs?
Plus, NO Lender Fee, NO Closing Costs Mortgages. How do they work?
A common mistake shoppers make is to ask: "What's your best interest rate?" or "What are your closing costs?" Both logical questions to ask, but they do not give the response most borrowers need to make a proper decision. Borrowers must understand both rates and fees. Rates are only half the answer to getting the best deal. It is possible end up with the lowest rate, or with low or no closing costs, but not necessarily the best deal.
Remember that nothing is ever free. Lenders simply use "reverse points" whenever they claim to offer any sort of low closing costs, or no fee mortgage.
Simply put, the lowest rate & the lowest fees do not go hand-in-hand. NO LENDER can offer both together. I can give you rock bottom rates, but it will cost you in fees. I can give you the lowest fees, but it will cost you in interest rate. Most lenders quote their best rate in combination with covering all third party fees (appraisal, credit report, title company, state taxes, county recording fees, etc) with 1% origination ("standard" in the example below).
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Here is an example of Rate vs. Costs on a $200,000 - 30 year fixed loan
RATES NOT ACTUALLY OFFERED - THIS IS JUST A SAMPLE FOR EDUCATIONAL PURPOSES
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Lower Rate |
Standard Quote |
Low Cost
|
Total NO Cost
|
|
Rate
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4.75%
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5.0%
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5.25%
|
5.75%
|
|
Origination
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1%
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1%
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None
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None
|
|
Discount Points
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1%
|
None |
None
|
None
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| Closing Costs |
$5042 |
$5042 |
$3042 |
$0.00 |
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Closing Costs with Points
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$7167
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n/a
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n/a
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n/a
|
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Monthly P & I Payment
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$1043.29
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$1073.64
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$1104.41
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$1,167.15
|
|
10 Years of Interest
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$92,352
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$95,240
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$98,151
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$108,037
|
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20 Years of Interest
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$155,609
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$162,618
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$169,718
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$188,181
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30 Years of Interest
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$181,300
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$190,232
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$199,311
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$221,909
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WHICH LOAN VERSION is RIGHT FOR YOU?
I can offer you all four options on all of our loans.
The combination of rate & fees can be very confusing. One lender is screaming "No closing costs." A second lender may quote you 5.25% with $2246 in fees, while another lender is offering 5.00% with $4130 in fees. So are closing costs and fees bad? Well if you ask everyone's brother who has a real estate license and knows everything about mortgages, then the answer you will most likely hear is yes. I am here to tell you everyone's brother is probably wrong.
Good enough answer? I didn't think so...
Begin by asking yourself "How long am I going to be in this property?" This is the single most important question to determine which option is best for you. Now look at the chart above. It becomes very obvious based on how long you are going to be in the home if 'Best Rate or Lowest Cost' makes the most sense for you and your family.
To properly shop, you must get all estimates on the same day at the same time. All estimates must have the exact same interest rate. Then you are only comparing cost.
Congratulations, you are now smarter than everyone's brother, mother and sister with a real estate license.
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Mortgage Lenders and Brokers in Minnesota and Wisconsin
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A very well, easy to read tutorial for consumers Joseph. I like the shopping advice too.