The Lenders Offer
Austin's Lender Guide
Analyzing the lender’s offer:
Mortgage Rates
Your mortgage rate refers to the rate of annual interest on your mortgage loan. Typically, that amount will remain the same throughout the life of the loan, barring refinancing. This type of mortgage is called a fixed-rate mortgage (FRM). Alternatively, your lender might offer you an adjustable-rate mortgage (ARM), especially if interest rates are very low, as they have been over the last few years, because they don’t want to get locked into a low interest rate when the rates are likely to rise in which case they hope to make more money.
Often adjustable-rate mortgages look very attractive, starting with interest rates below the current rate; they may even limit increases so that the borrower does not have to worry about large jumps in their rates. However, unless the current fixed-rate is above 10%, it is generally NOT advisable to take adjustable-rate mortgages. And even in those instances when it is possibly the better option, you would do well to pay a small fee to an independent financial advisor (generally around $50) to get his opinion of the terms of the deal.
Points
Origination points – Banks typically charge fees to borrowers for the privilege of taking a loan from them, on which you’ll also be paying interest. This is called an “origination fee”. The fee amounts to a certain number of “points”, which are calculated as a percentage of the price of the home. For example, a $100,000 home on which a lender charges 2.5 points, will cost you, the borrower, $2500. This is usually the biggest part of the closing costs.
All banks charge different amounts, and this is one of the things you will have to consider when comparing your multiple loan offers.
Discount points – Obviously, the lower the interest rate the lender offers, the better. But, often banks will sweeten a slightly higher interest rate, by offering you the opportunity to buy discount points. For example, the may offer you a fixed rate of 8%, but tell you that you can have a 7.5% if you buy 4 points, which like origination points will be included in your closing costs.
So, on a $100,000 house, you are offered a rate of 8%, which you can lower to 7.5% by paying $4000. Is that a good deal? Since this can get very complicated, and involves calculating the long term interest on your mortgage, the easiest thing to do is refer to the table below:
Effective interest rate, including point buy + rate calculations |
|||||||||||
30 year mortgage |
|||||||||||
Points |
6% |
6.5% |
7% |
7.5% |
8% |
8.5% |
9% |
9.5% |
10% |
10.5% |
11% |
1 |
6.09 |
6.60 |
7.10 |
7.60 |
8.10 |
8.61 |
9.11 |
9.62 |
10.12 |
10.62 |
11.13 |
2 |
6.19 |
6.69 |
7.2 |
7.70 |
8.21 |
8.72 |
9.22 |
9.73 |
10.24 |
10.74 |
11.25 |
3 |
6.28 |
6.79 |
7.30 |
7.80 |
8.31 |
8.82 |
9.33 |
9.84 |
10.35 |
10.87 |
11.38 |
4 |
6.38 |
6.88 |
7.39 |
7.91 |
8.42 |
8.93 |
9.44 |
9.96 |
10.47 |
10.99 |
11.50 |
5 |
6.46 |
6.98 |
7.49 |
8.01 |
8.52 |
9.04 |
9.55 |
10.07 |
10.59 |
11.11 |
11.63 |
6 |
6.55 |
7.07 |
7.59 |
8.11 |
8.62 |
9.14 |
9.66 |
10.19 |
10.71 |
11.23 |
11.75 |
7 |
6.64 |
7.16 |
7.68 |
8.21 |
8.73 |
9.25 |
9.77 |
10.30 |
10.82 |
11.35 |
11.87 |
8 |
6.73 |
7.26 |
7.78 |
8.31 |
8.83 |
9.36 |
9.88 |
10.41 |
10.94 |
11.47 |
12.00 |
15 year mortgage |
|||||||||||
1 |
6.16 |
6.66 |
7.16 |
7.66 |
8.17 |
8.67 |
9.17 |
9.67 |
10.18 |
10.68 |
11.18 |
2 |
6.31 |
6.82 |
7.32 |
7.82 |
8.33 |
8.83 |
9.34 |
9.84 |
10.35 |
10.87 |
11.36 |
3 |
6.46 |
6.97 |
7.48 |
7.99 |
8.49 |
9.00 |
9.51 |
10.02 |
10.52 |
11.03 |
11.54 |
4 |
6.62 |
7.13 |
7.64 |
8.15 |
8.66 |
9.17 |
9.68 |
10.19 |
10.70 |
11.21 |
11.72 |
5 |
6.77 |
7.28 |
7.79 |
8.31 |
8.82 |
9.33 |
9.84 |
10.36 |
10.87 |
11.38 |
11.90 |
6 |
6.92 |
7.44 |
7.95 |
8.46 |
8.98 |
9.49 |
10.01 |
10.52 |
11.05 |
11.56 |
12.07 |
7 |
7.07 |
7.59 |
8.11 |
8.62 |
9.14 |
9.66 |
10.17 |
10.69 |
11.21 |
11.73 |
12.25 |
8 |
7.22 |
7.74 |
8.26 |
8.78 |
9.30 |
9.82 |
10.34 |
10.86 |
11.39 |
11.90 |
12.42 |
Looking at the table, you will see that an interest rate of 7.5% with 4 points is the same as a 7.91% interest rate, which is lower than 8%. So buying the points saves you money in this instance, but then of course, you will want to compare it to your other offers and decide which is most advantageous for you.
Also remember that all types of point costs and the total closing costs for your mortgage can be rolled up into the mortgage itself, and you need not have this money in cash in order to accept the loan offer. Of course, paying up front with cash, when possible, is always a good way to go.