Choosing the best mortgage isn’t simply a matter of picking the one with the lowest
monthly payment, or even the best posted rate.
Suppose one lender offers a mortgage at 6 percent, plus two points, while another offers a similar product at 6.5 percent, but no points. Or perhaps one lender offers a
mortgage with a manageable monthly payment, but you discover later that you also have to pay private mortgage insurance that adds hundreds of dollars to the annual cost. In each case, it’s important to do the math to determine which is the better deal.
Mortgages may express their interest rates in various ways, and may carry hidden fees. Homeowners need to consider all of these as they shop around for the best loan.
Introductory rates
Many adjustable rate mortgages offer low introductory or “teaser” rates. It’s important to remember that these rates usually apply for only a few months, after which they go up significantly. If you take advantage of introductory rates, you will need to budget for the inevitable rise in your monthly payment. If you agree to a loan with an introductory rate, make sure you understand how long the rate will last. Some rates are good for only 30 days; make sure you read all disclosures so you’re not surprised when your mortgage bill arrives.
Discount points
Discount points are fees paid up front to obtain a lower interest rate. One point equals one percent of the loan amount and will typically lower the rate by 0.25 percent. Paying points may be worthwhile if you plan on keeping your mortgage for an extended period of time. If you intend to hold the mortgage for only a few years, however, the cost may exceed the benefit you’ll receive from a lower rate.
For example, if you are considering a $150,000 mortgage at 7 percent, you may be able to lower the rate to 6.5 percent by purchasing two points at a cost of $3,000 (two percent of $150,000). Next, find out how much you’ll save per month by paying points. In this example, if the loan is a 30-year fixed mortgage, the difference in monthly payments is $50 per month. Divide your cost by the monthly savings ($3,000 ÷ $50) to determine your break-even point (60 months, or 5 years). This means you will have to stay in your mortgage at least 5,recoup the cost of paying for points.
You can use the Discount Points calculator in the LendingTree.com Smart Borrower Center to help you do the math to decide whether paying points makes sense for you
Private mortgage insurance
If you are borrowing with a down payment of less than 20 percent, you may be required to have private mortgage insurance (PMI), which protects the lender if you are unable to pay back the loan. In this case, you may be required to pay annual or monthly premiums, or have a one-time fee added to your loan amount. Be sure to include this expense in your comparison. You should notify your lender to cancel the insurance once you have paid 20 percent of the principal on the loan.
Fees
Mortgage lenders may charge for a range of services, including fees for processing your application, conducting a title search, having your home appraised, obtaining your credit report, and other administrative or legal services. Borrowers may choose to pay these costs by adding the amount to their loan principal. In other cases, lenders may waive the fees in exchange for a higher interest rate.
Lenders may give different terms for these fees, or may combine several under a single name, making it difficult to know what you’re paying for. Your lender must provide you with a written good faith estimate (GFE) of these costs within three days of receiving your loan application. Your lender is also required to provide you with a Truth in Lending
(TIL) form. Read this closely; it will tell your annual percentage rate, if your loan is adjustable or not, and if there is a pre-payment penalty associated with your loan.
Annual percentage rate (APR)
To help homebuyers evaluate mortgages on a level field, the federal government requires lenders to publish the loan’s annual percentage rate (APR). This figure is designed to express the true cost of the loan by taking into account the base interest rate and several other fees charged by the lender. (Not all fees associated with a mortgage are included in the APR.)
Unfortunately, comparing mortgage costs over the medium and long term is not as simple as looking at the APR. You should not, for example, look only at the APR when comparing mortgages with different terms, such as a 15-year versus a 30-year mortgage. Nor is it possible to project future costs of an adjustable rate mortgage. Nevertheless, the APR is a
useful starting point for comparing the cost of loans.
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