Mortgage Shopping Tips

Components of a Rate and Fee Quote

1. Premium Rates

   • Definition: A Premium Rate is any interest rate that is higher than the market's “Par Rate” (the base rate offered by lenders). For instance, if the Par Rate is 6.00%, offering a rate of 6.25% would mean you are receiving a Premium Rate.

   • Revenue for Lenders: Lenders earn revenue from the difference between the Par Rate and the Premium Rate you accept.

2. Lender Fees

   • Types of Fees: These can include Processing Fees, Underwriting Fees, and Origination Fees, among others.

   • Purpose: Lender fees cover the costs associated with processing, closing, and funding your mortgage. They are charged by the lender for the services they provide.

3. Discount Points

   • Definition: Discount Points are upfront fees you pay to lower your interest rate. One point equals 1% of your loan amount. For a $350,000 loan, 2 points would cost $7,000.

   • Impact on Rates: Paying discount points typically reduces your interest rate below the Par Rate. For example, paying points might lower your rate from 6.00% to 5.75%.

Factors to Consider

1. Loan Duration

   • Long-Term Loans: If you plan to keep the mortgage for many years, paying discount points to secure a lower interest rate can be economically beneficial. The savings from a lower rate can outweigh the upfront cost over time.

   • Short-Term Loans: If you anticipate moving or refinancing within a few years, it might be better to avoid points. The higher rate, although more expensive in monthly payments, will be offset by the fact that you won’t be paying it for long.

2. Available Cash

   • Upfront Costs: Consider if you have enough cash to cover the upfront cost of points or fees. If you have high credit card balances or other financial obligations, it might be wiser to avoid paying points and opt for a higher rate instead.

   • Opportunity Cost: Think about how else you could use the money spent on points. If investing the money elsewhere could yield better returns, it might be more beneficial than lowering your mortgage rate.

Example Analysis

• Scenario: If you take a $350,000 loan and pay 1 Discount Point ($3,500) to reduce your interest rate, you would save $88 per month.

  • Break-Even Point: After 40 months of savings, you recoup the cost of the point.

  • Long-Term Savings: Over a 10-year period, this could translate into an additional $7,060 in interest savings.

  • Tax Benefits: Discount points are tax-deductible in the year they are paid, which can further impact your decision.

Investment Perspective

View paying points as an investment. The longer you stay in your home, the higher the return on this investment, as you will continue to benefit from the lower interest rate over time.

Final Considerations

• Compare Offers: Obtain quotes from multiple lenders to compare rates, fees, and points.

• Evaluate Your Financial Situation: Assess whether paying points aligns with your financial strategy and how it fits into your long-term plans.

By thoroughly understanding these components and factors, you can make a more informed choice about your mortgage loan options.