When looking for a mortgage loan, you'll find that each lender's loan programmes have different rates, fees, and points. It's important to know the three parts of a Rate and Fee Quote when looking for a mortgage loan: (1) Premium Interest Rates, (2) Lender Fees, and (3) Discount Points.
Any interest rate above the market rate is a premium rate offer (referred to as the "Par Rate"). Even though the Par Rate changes all day long, most lenders will agree to a certain Par Rate early in the day. If the Par Rate is 6%, the lender will only make money if the rate they give you is higher than Par (for example, 6.25 percent ).
Lender fees are charged for services that the lender does directly, such as Processing Fees, Underwriting Fees, Origination Fees, and so on. These fees help cover the cost of processing, closing, and funding your mortgage loan.
As one point is equal to 1 percent of your loan amount, discount points are often the largest fees that come with your mortgage loan. If you want a $350,000 loan and pay two discount points, your discount point fee would be $7,000. Borrowers can get rates below the Par Rate if they have enough Discount Points. For instance, if the Par Rate is 6%, a rate of 5.75% means that the borrower will have to pay Discount Points.
b>Things to Think About/b>
Every lender offers a wide range of Rates, Fees, and Points that can be combined in different ways. When trying to decide between all of these programmes, rates, and fee packages, it can be hard to know what to do. Often, it helps to answer a few key questions to narrow down the options:
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How long do you think this loan will last? When figuring out your timeline, think about how likely it is that you will be relocating, moving, or refinancing. Think about the next five and ten years.
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Do you have the money to pay extra fees now to lower the amount of interest you'll have to pay later? Make sure that paying fees up front is the best way for you to spend your money. For example, if you have a lot of debt on your credit card, it might not be a good idea to pay higher fees or points for a lower rate.
If you plan to keep the mortgage for a long time, it makes financial sense to pay points to lower the rate because you will keep the lower rate for a long time. If you don't have much time, you should avoid points and pay the higher rate, since you won't have to pay it for long.
If you plan to keep your loan for 5 years, paying 1 Discount Point on a $350,000 loan will cost you $3,500 up front but save you $88 a month. After 40 months of savings, you'll have paid off the initial cost and be able to take advantage of the lower rate. If you keep the loan for 10 years, you'll save an extra $7,060 in interest over the course of the loan. Just like interest, you can deduct all of the points you pay in the year you pay them.
The second factor is what you could have done instead. If you didn't use the money to buy points, what else could you do with it? Even if you plan to live in your house for a long time, you might have better ways to spend your money than saving money in the long run with a lower interest rate. Consider the payment of points as an investment that gives you a return that goes up the longer you live in your house. This is a good way to put all of these things together.
