The Loan Type Also Has A Heavy Influence On Your Rate

Category: Finance, Mortgages.

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. In this article, we ll go through each of the loan variables.

With all the loan variables, it s tough to compare one lender to another. Down Payment: In general, the more you can put down, the better interest rate you can get. If you are looking for the best rate possible and can put down more, ask your lender about this option. 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. Loan Life: The longer the term, the more total interest you will pay. For instance, today s rate from a large bank is 375% for a 15 year and 75% for a 30 year.

This is partly because you will have a better interest rate with the 15 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. For example, on a 30- year$ 240, 000 loan at 5% , if you pay$ 272 more per month, you can end up paying the loan off in 15 years instead of 3 Property Taxes: When comparing lenders, this number should not vary because your property taxes are paid to the city, and state, county, not the lender. 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. So, this number should be constant across all lenders. The easiest way to compare the lenders is to just compare the principal plus interest and add in the same number for taxes. 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.

Essentially, you are standarizing the estimated payments between the lenders so that you can compare the actual rates. Insurance Rate: Again, the insurance is an estimate that the lenders will make. Another way of doing this comparison is to ignore the estimated payments and rather concentrate on the actual interest rate they are quoting you. They may estimate differently, so be sure to normalize this number across all the estimated payments. The higher the credit score, the better the rate. Interest Rate: The interest rate is variable depending on your credit score, and loan type, income.

Lenders have cut- offs for what they consider above average, and low, average. Your income comes into play when they figure your debt- to- income ratio. If you can be in the above- average group, they will get the best rates. This is basically a way to measure how much you are bringing in and how much you are spending. One thing to consider about your debt is not what the lender says you can handle but what you want to handle. At some point, a lender will not create more debt for you than they think you can handle. The loan type also has a heavy influence on your rate.

Points: Points are paid by the Borrower in order to buy down the interest rate. A better rate is given to those who will owner occupy the property. 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. So for example, with a loan for$ 240, one point would, 000 be$ 2, 400 and that point might buy your interest rate of 5% down to 25% . A point is equal to 1% of the loan amount, and you pay this point as part of your closing costs. Buying down your rate will lower your monthly payment.

This levels the playing field so that you can determine who has the best rate without having to do all kinds of crazy calculations. When comparing lenders, make sure they all quote you a rate with no points. Closing Costs: In addition to points, the Borrower pays 2- 3% in loan- related closing costs. 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 majority of closing costs are lender fees. The fees you pay include loan origination fees, lawyer fees, appraisal fee, credit score application fee, and document preperation fees. Now, the toughest part is to compare lenders and weigh out all the closing costs and points paid along with the interest rates.

Ok, so those are the main components of the loan to sort through and compare. How do you compare one lender with a 5% interest rate with$ 5, 000 in closing costs to another lender who has a 0% rate with$ 8, 000 in closing costs? 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. The rate is better but you are paying more for it at closing, so is that$ 3, 000 extra really worth 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.