What is the cost of a loan? Most people want to know what the interest rate is on a mortgage, but what about the fees. It costs money to get a loan. There are typically lender fees including underwriting, doc prep fees, discount points, and origination fees. A lender may charge some fees at one rate and other fees at a different rate.
In order to compare loans between lenders or to know whether it is advisable to buy the rate down, the buyer must do the math. Here is a simple example to illustrate the effects.
If the discount rate is 1% to lower the interest rate ¼% and the difference in the payment is approximately $15 on a $100,000 loan, the buyer would divide $15 into $1000. In order to save $15 a month the buyer will have to live in the house 67 months before actually realizing any savings. If the buyer moves or refinances prior to the 67th month, the upfront fee he paid to lower the monthly interest payment was more than he would have paid with a higher rate.
Sometimes builders will pay closing costs when a buyer uses a preferred lender. This lender is someone who is familiar to the builder and that they may have negotiated lower fees. The interest rate should be competitive with other lenders. Of course, sometimes another lender will quote a lower rate that the preferred builder’s lender. But if the builder will not pay the closing costs when a non preferred lender is used, the lower interest rate may cost the buyer more money overall.
Example: If the closing costs with the non preferred lender are $2500 and the interest rate is ½% more making the payment an extra $30 a month. If the buyer pays there own closing costs, it will take 83.3 months or almost 7 years to recoup the $30 a month. If the buyer lives there longer than this then it makes sense to pay the money up front and take the lower monthly interest rate. However statistically we know most people move prior to realizing the benefits of the lower interest rate.
Always make sure you get a good faith estimate and understand which fees are controlled by the lender and which fees are third party fees. This way you can compare the complete cost of a loan.
If you need help with real estate questions, are looking to buy or sell please call me Sandi at 405-213-2992 or visit my website at http://www.sandiwalker.net