Tidbits to Know Before You Begin Your Mortgage Process
Written by Dongmiao Cui   

Before you get a loan, it is important to compare the offers from various lenders. To find out the optimal option, you might need to understand the basic items offered in the contracts that you will base your comparison on.


Term of Loan

This is the duration of the loan, up to 30 years. Usually the duration of 15 and 30 year are very common.


Annual Percentage Rate (APR)

This is the rate quoted to borrowers. The determinants of the rate are usually borrowers’ credit reports and the level of default risk. APR is equal to the interest rate per period multiplied by the number of periods in year. APR is also the rate that determines monthly payment.

Example: if you have the following two quotes for $150,000 mortgages, each for a 30-year term:

Lender A offers 6.5 percent with the borrower paying no discount points and $5,000 in fees; Lender B offers 6.25 percent with the borrower paying 1 discount point ($1,500) and $5,500 in fees, for a total of $7,000 in points and fees.

Lender B offers a lower interest rate (or "nominal rate"), but for $2,000 more in points and fees.

Which is a better deal? APR gives you a general idea:

Lender A's offer has an APR of 6.83 percent, while Lender B's offer has an APR of 6.71 percent. Since Lender B's APR is lower, that loan is a better deal in the long run.


Origination Points v Discount Points

Mortgage Points are a type of fee paid at closing by the borrower to the mortgage lender. There are two types of points: Origination Points and Discount Points. Each point equals to 1% of the loan amount. Origination points are charged to recover some costs of the loan origination process. Your loan officer’s compensation is based on the origination points.

Discount points are a form of pre-paid interest. One point equals one percent of the loan size. You can reduce the interest rate by offering to pay points. You can use this method to get a lower monthly payment. Each point typically reduces the loan rate by 0.125%. You can also buy points for the purpose of qualifying for a loan. Some loans require a certain level of monthly income and hence will only be approved by decreasing the monthly payment through purchasing points to cut the interest rate.

In a nutshell, origination points are necessary if the lender requires it as a way of paying their compensation. But discount points are more of a borrower’s choice.



 
Last Updated on Wednesday, 22 December 2010 05:15