How to choose the best Mortgage Rate?
It doesn’t matter what state you’re from finding the best possible mortgage loan can be difficult if you don't know a little bit about how the different types of mortgage loans work.
The average mortgage rate for a 30year fixed rate loan is approximately 4.75 percent, but that can fluctuate on a daily basis. When it comes to mortgages, the rate is the bait and the closing costs are the hook so potential homeowners and refinancers need to look closely at all the figures. For example, you may or may not know that:
The annual percentage rate (APR) includes the upfront costs of the loan, while the stated rate does not. The APR helps you compare mortgages that have different closing costs.
A mortgage with a low monthly payment doesn't always have a low interest rate. Sometimes, low payments mean that you aren't paying down any principal. Compare mortgage loans on all terms, not just by the payments.
It's essential to understand how your payments will be applied to your debt balance over time. Faster reduction of your principal balance leads to lower interest costs.
Pay close attention to the Annual Percentage Rate (APR); it is often used to compare mortgage lenders and the programs they offer. While it’s not the most effective tool for lender/loan comparison, it can open your eyes to all the fees and costs a lender is really tacking on.
Some of the fees/closing costs that the APR includes are:
Points (discount and origination points)
Prepaid interest (from closing date to the end of the month)
Loan processing fee
Underwriting fee
Document preparation fee
Private mortgage insurance
When lenders calculate APR, they assume that the mortgage won't be paid off early even though the average life span of the loan ranges from 5 to 7 years for most borrowers. The APR also doesn't consider the value of money used for paying lender fees even though you may use it to get a low rate on your mortgage. Until and unless the fees are added to the closing costs, the lenders won't consider it when they calculate APR.
Let's consider 2 mortgages - A and B, both being fixed rate mortgages of the same amount and loan term (30 years).
Loan A has the following details:
Mortgage amount = $200,000
Interest rate = 6%
APR = 6.25%
Lender fees = $5000
Loan B has the following details:
Mortgage Amount = $200,000
Interest = 6.25%
APR = 6.45%
Lender fees = 1500
Loan A: The amount financed (loan amount minus fees, points, etc) = $(200,000 – 5000) = $195,000 and the Payment is approximately $1199.10
Loan B: The amount financed = $(200000 – 1500) = $198,500 and the Payment is approximately $1231.43
We see that loan A has a low Annual Percentage Rate but you need to pay higher lender fees for loan A whereas if you go for loan B, you can save money on fees.
You must take into consideration how long you may remain in the home and what you’re really saving. It may be worth it to pay higher fees upfront and reduce your monthly mortgage payment or simply pay the extra $32 per month and not pay extra in upfront fees.
When you review all the low interest rates be sure to ask what the lender fees are. That will help you make a more educated decision.
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About the Author: Millie Gil is a licensed Real Estate Broker and Vice President of Bold Real Estate Group. For more information please forward email to communityinfo@comcast.net