Interest Rates — When it sounds too good to be true, is it?
When a lender tells you there are NO CLOSING costs for the loan you are getting can this be true?
Know why interest rates are different, the closing costs associated with a loan, and who pays for what.
Knowledge is Confidence!
Imagine you're comparing the interest rates and fees of different lenders and you run across one who mentions they can offer you a loan with NO CLOSING costs and you think to yourself “WOW” that will save me a bunch of money. Why are some lenders, especially online lenders, so different? You are so confused and do not know why. Are these people really working for FREE?
Comparing one mortgage to another isn’t as easy as just comparing interest rates.
To Make A Fair Comparison you need to Compare Three Major Components of a loan’s price—interest rate, discount points AND closing costs!
Interest Rate
The “lowest” interest rate is actually the rate that best fits your unique situation. Your finances, credit score, and the type of loan you need all play a part in determining your interest rate. For example, the interest rate for a homebuyer with an 800 credit score, a sizeable down payment, and the ability to pay points at closing may be quite different from other borrowers.
Discount Points
Discount points are sometimes referred to as “points”. They are really prepaid interest but function to buy a lower interest rate on your loan. One point equals 1% of the loan amount. Once you pay points upon closing the money is gone. If you were to sell or refinance in the short term this money could be considered wasted.
Closing Costs
Understand that every lender refers to charges differently. Some itemize the charges and others lump them together. There are actual LENDER charges and there are THIRD PARTY expenses. Each lender knows what their charges will be but can only estimate what the third party charges are. Typical lender fees include charges for document preparation, underwriting/processing, administration and origination. Third party fees include charges for title searches, flood certification, appraisals, and such.
Prepaid items are also a part of closing costs. These include up front annual homeowner’s insurance plus escrows, property tax escrows, and daily interest from the day you close your loan through the end of the month.
Many homebuyers such as you will try to find the best deal by looking online and calling random lenders to try to save money as you shop for your home. The problem is that you do not understand what you need to know to make a fair comparison. While you thought you had found a deal TOO GOOD TO BE TRUE you might actually end up spending more money and paying more interest over the life of your loan.
I've gathered a lot of experience over the past 25 years and can help clients like you feel more confident when you are ready to lock in an interest rate and write an offer!