All rates are not created equal. Behind each interest rate is loan fees. This is where the rubber meets the road. A 3.5% interest rate may be much worse for you than a 4%. Rate buy down fees, underwriting fees and other loan origination costs can dramatically worsen an attractive rate that you saw online. So how do you compare these fees to your rate to make sure you are getting the best rate for your situation? The simple answer is to review your APR but there is more to it than that.
YOU WANT TO UNDERSTAND WHAT MAKES UP AN APR AND HOW THE FEES INCLUDED WITHIN EFFECT YOU.
First, you want to review any applicable discount fees. A 3.5% rate with 3 points in buy down fees when other lenders are only charging you 3.75% at 1 point doesn’t look so good anymore. A point is simply 1% of your loan balance. For instance, 1 point on a $300,000 loan is $3,000.
Second, you want to review all other applicable lender fees (underwriting, rate lock fee, origination fee, processing fee, document preparation fee, tax preparation service, etc.) Some lenders will claim 0 discount fees but then will simply bake this into their origination fee. So, in other words, a 3.5% interest rate with 0 discount points but 3% in origination fees put you in a low rate/high fee situation.
Third, review the escrow (an impound account) and third party title fees as well. These will largely be similar no matter who you use as these are non-rate dependent, mortgage company profiting fees, but it’s helpful to review to get an exact picture for funds due at closing. For instance, some lenders will dramatically mark down your escrow collection, all the while knowing the full collection will be materialized at closing, just to make it look like your cash from you at closing is much lower than it really will be. Despite not having any bearing on the collection nor the amount collected, understating escrows is still a sneaky tactic that many lenders use to make the initial terms look better.
Lastly, look at your initial payoff and your new loan balance. The biggest trick some lenders will play is to advertise to you that there are “No funds due from you at closing.” Let’s look at this way:
- Option A – 3.5% Interest Rate
- 0 points
- 3% origination fees
- $3,000 in title and escrow collection
- Payoff = $300,000
- New Loan Amount =$312,000
- Principle and Interest payment = $1,388
- Funds due at closing = $0
- Option B – 3.75% Interest Rate
- 0 points
- 0% Origination fees
- $3,000 in title and escrow collection
- Payoff = $300,000
- New Loan Amount = $303,000
- Principle and Interest payment = $1,403
- Funds due at closing = $0
Both options claim 0 points and “No funds due at closing” and Option A nets a rate of 3.5% versus the 3.75% offered in Option B. Most customers hear “0 points and nothing due at closing” and tie this to the lower rate being the better offer. But after a true comparison, you see that the lender fees are so high in Option A that it increases your loan amount $6,000 over option B, thus the lower rate only being $15 cheaper per month.
So, if you chose Option A and the attractive rate, all you got was $15 cheaper per month and an additional $6,000 in loan fees. In other words, it would take you 400 total months of saving $15 per month to recoup the additional cost of Option A, which is longer than the entire loan term by itself. This is why it’s important to read and interpret any estimate provided to you.
