Best Rate or Lowest Closing Costs - Plus No Lender Fee, or No Closing Costs Advertising
HOW DO THEY WORK?
A common mistake shoppers make is to ask: "What's your best rate?" or "What are your closing costs?" Both logical questions to ask, but they do not give the response most borrowers need to make a proper decision. Borrowers must understand both rates and fees. Rates are only half the answer to getting the best deal. It is possible end up with the lowest rate, or with low or no closing costs, but not necessarily the best deal.
Remember that nothing is ever free. Lenders simply use "reverse points" whenever they claim to offer any sort of low closing costs, or no fee mortgage.
Simply put, the lowest rate & the lowest fees do not go hand-in-hand. NO LENDER can offer both together. I can give you rock bottom rates, but it will cost you in fees. I can give you the lowest fees, but it will cost you in interest rate. Most lenders quote their best rate in combination with covering all third party fees (appraisal, credit report, title company, state taxes, county recording fees, etc) with 1% origination. See the example below.
Here is an example of Rate vs. Costs on a $150,000 - 30 year fixed loan
| Lower Rate | Normal Quote | Low Cost | Total NO Cost | |
Rate | 6.5% | 6.75% | 7.00% | 7.75% |
Origination | 1% | 1% | None | None |
Points | 1% | None | None | None |
Total Closing Costs | $5347 | $4130 | $2346 | None |
Monthly P & I Payment | $948.10 | $972.90 | $997.95 | $1,074.62 |
10 Years of Interest | $93,963 | $96,227 | $98,502 | $109,853 |
20 Years of Interest | $164,069 | $169,752 | $175,489 | $197,451 |
30 Years of Interest | $194,345 | $201,768 | $209,295 | $236,861 |
The combination of rate & fees can be very confusing. One lender is screaming "No closing costs." A second lender may quote you 7.00% with $2246 in fees, while another lender is offering 6.75%% with $4130 in fees. So are closing costs and fees bad? Well if you ask everyone's brother who has a real estate license and knows everything about mortgages, then the answer you will most likely hear is yes. I am here to tell you everyone's brother is probably wrong.
Good enough answer? I didn't think so...
Begin by asking yourself "How long am I going to be in this property?" This is the single most important question to determine which option is best for you. Now look at the chart above. It becomes very obvious based on how long you are going to be in the home if 'Best Rate or Lowest Cost' makes the most sense for you and your family.
Congratulations, you are now smarter than everyone's brother, mother and sister with a real estate license.
