Comparing Mortgage Offers Between Lenders
June 10, 2020
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Mortgage offers can be tough to understand. It may feel like you need to develop a new vocabulary to grasp the key words of the mortgage business. What’s worse, in an industry that’s highly competitive, some lenders may take advantage of buyers’ confusion and urgency. By going into the homebuying process with an improved understanding of mortgage offers, homebuyers can be better prepared to choose the loan that is in their best interest.
First, let’s take a look at a common “point” of confusion – the mortgage point. Then we’ll move on to how borrowers can compare mortgage offers side by side, so the costs associated with each deal become more transparent.
We asked Alexander Szydlowski, VP of Loan Originations at RSI Bank, to answer some questions about mortgage points, also called discount points, and when they benefit the customer.
Alex, what is a point?
AS: A mortgage point is pre-paid interest that borrowers can pay upfront in exchange for a lower interest rate. One point is equivalent to one percent (1%) of the loan amount. For example, 1 point on a $100,000 mortgage would cost $1,000; a ½ point on a $100,000 mortgage would cost $500.
When would a homebuyer want to “buy down the rate” by paying a point or part of a point?
AS: Homebuyers planning to stay in a home long term without refinancing their loan are better suited to buying down the rate by paying points. There would not be a benefit to buying a point for a homebuyer looking to sell or refinance in the short term.
How long does it take to recoup the cost of buying a point?
AS: To calculate the time it would take to recoup the cost, you must divide the cost of buying a point by the monthly savings. This will result in how many months it would take to recoup the initial costs or to break even. For example, if buying 1 point on a $100,000 mortgage costs $1,000, you would divide $1,000 by the monthly savings generated from lowering the rate to reveal how many months it would take to recoup the $1,000.
Sometimes lenders list mortgage interest rates with a fraction of a point, while other lenders list rates with zero points. How can borrowers research mortgage rates between lenders for an “apples-to-apples” comparison?
AS: A simple way to compare offers is to look at the Annual Percentage Rate (APR). The APR is the annual cost of a loan to a borrower and it includes other charges or fees. These charges and fees may include mortgage insurance, closing costs, points, and loan origination fees. When comparing mortgages, a higher APR indicates a larger upfront cost.
What considerations should borrowers make when comparing mortgage offers?
AS: Always ask your lender to provide a loan estimate. The loan estimate will provide a detailed breakdown of expected costs. Lender costs, such as points, origination fees, and application fees, can mask the true rate you are receiving.
In addition to the rate, loan servicing should be factored into a borrower’s decision. Loan servicing refers to collecting monthly payments, paying taxes and other aspects of the loan that take place after the mortgage has closed and until it is paid off. Working with a smaller institution allows for more personalized service, as well as the opportunity for in-person payments.
How does a borrower know if a loan will be serviced by a lender?
AS: Asking the loan officer upfront and reviewing the loan estimate is the best way to determine if the originating lender will service your loan. The loan estimate will clearly state whether the originating lender intends to service the loan. (It is likely that a mortgage company will not service a loan.)
What other factors should a borrower consider when reviewing loan options?
AS: When evaluating loan options, borrowers should be mindful of their credit scores, down payment, and the type of property they are financing. A 30-year fixed mortgage is typically the first option borrowers will consider. It is important for borrowers to evaluate their financial picture and goals when determining if a 30-year mortgage is right for them. For example, a lower payment and longer duration do not always equate to savings when refinancing.
Read our other articles on preparing for homeownership, home equity loans, mortgage terms or contact our Mortgage department at 723.587.1525 for more information on the homebuying and mortgage processes. We’re here to help.
The information provided in this article is meant for educational purposes only and is not advice. Please speak with a Lending Representative for specific details on RSI Bank’s mortgage programs, home equity loans and lines of credit.
RSI Bank | Institution NMLS# 409467 | Alexander Szydlowski NMLS# 412631