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When you decide to buy a house, one of the first tasks is to talk to a couple lenders and choose which lender & loan is best for you. With all the loan variables, it’s tough to compare one lender to another. In this article, we’ll go through each of the loan variables.
1. Down Payment:
In general, the more you can put down, the better interest rate you can get. There is a point at which it does not matter how much more you put down, and that point is usually either 20% or 30%, depending on the loan program. If you are looking for the best rate possible and can put down more, ask your lender about this option.
2. Loan Life:
The longer the term, the more total interest you will pay. This is partly because you will have a better interest rate with the 15 year; for instance, today’s rate from a large bank is 6.375% for a 15 year and 6.75% for a 30 year.
The other reason you pay less interest over the life of the loan with a 15 year term is because you pay down your principle faster. Instead of getting a shorter life term on the loan up front, another option to pay less total interest is to pay more into your mortgage each month to pay the loan down quicker. For example, on a 30-year $240,000 loan at 6.5%, if you pay $272 more per month, you can end up paying the loan off in 15 years instead of 30.
3. Property Taxes:
When comparing lenders, this number should not vary because your property taxes are paid to the city, county, and state, not the lender. So, this number should be constant across all lenders. But, when you look at estimated payments from different lenders, the estimated taxes will vary because it is their best guesses at what the tax bill will be at the end of the year.
The easiest way to compare the lenders is to just compare the principal plus interest and add in the same number for taxes. Essentially, you are standarizing the estimated payments between the lenders so that you can compare the actual rates. Another way of doing this comparison is to ignore the estimated payments and rather concentrate on the actual interest rate they are quoting you.
4. Insurance Rate:
Again, the insurance is an estimate that the lenders will make. They may estimate differently, so be sure to normalize this number across all the estimated payments.
5. Interest Rate:
The interest rate is variable depending on your credit score, income, and loan type. The higher the credit score, the better the rate. Lenders have cut-offs for what they consider above average, average, and low. If you can
be in the above-average group, they will get the best rates. Your income comes into play when they figure your debt-to-income ratio. This is basically a way to measure how much you are bringing in and how much you are spending. At some point, a lender will not create more debt for you than they think you can handle. One thing to consider about your debt is not what the lender says you can handle but what you want to handle. The loan type also has a heavy influence on your rate. A better rate is given to those who will owner occupy the property.
6. Points:
Points are paid by the Borrower in order to buy down the interest rate. If you get some insanely low interest rate from one lender that seems completely out of whack from the other quotes, this might be because they are quoting you a rate with points. A point is equal to 1% of the loan amount, and you pay this point as part of your closing costs. So for example, with a loan for $240,000, one point would be $2,400 and that point might buy your interest rate of 6.5% down to 6.25%. Buying down your rate will lower your monthly payment.
When comparing lenders, make sure they all quote you a rate with no points. This levels the playing field so that you can determine who has the best rate without having to do all kinds of crazy calculations.
7. Closing Costs:
In addition to points, the Borrower pays 2-3% in loan-related closing costs. The majority of closing costs are lender fees. To demonstrate the price you pay for borrowing money, if you pay cash for a property, the closing costs ends up being more like $300 instead of $6,000 for a $300,000 sales price. The fees you pay include loan origination fees, appraisal fee, lawyer fees, credit score application fee, and document preperation fees.
Ok, so those are the main components of the loan to sort through and compare. Now, the toughest part is to compare lenders and weigh out all the closing costs and points paid along with the interest rates. How do you compare one lender with a 6.5% interest rate with $5,000 in closing costs to another lender who has a 6.0% rate with $8,000 in closing costs? The rate is better but you are paying more for it at closing, so is that $3,000 extra really worth it? To compare this, the lender can provide you with the Annual Percentage Rate (APR), which is the interest rate calculated with closing costs wrapped into it. As long as you are comparing two exact same loan lifes and are putting the same amount down, the APR is the easiest way to determine who has the better overall package.
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