THE RELATIONSHIP BETWEEN POINTS AND INTEREST RATES
Even
the most experienced homebuyers have difficulty understanding the
relationship between the interest rate and the points or fees
associated with their loans. The
reality is that the two are directly related in that
"points" are nothing more than interest that is charged up
front. The actual rate and number of points a borrower
pays is largely dictated by the quality of the borrowers credit. As the credit quality decreases, the interest rate,
points and fees increase. This
is because these loans are more difficult to fund and pose a greater
risk of default to the lender.
Here
are some issues to consider;
Often the price of a home mortgage loan is stated in terms of an interest rate, points and other fees. A point is a fee that equals 1 percent of the loan amount. Points are usually paid to the lender, mortgage broker, or both, at the settlement or upon completion of the escrow. Often, you can pay fewer points in exchange for a higher interest rate or more points for a lower rate. Ask your Certified Loan Broker about points and other fees.
A
document called the Truth in Lending Disclosure Statement will show
you the Annual Percentage Rate (APR) and other payment information for
the loan you have applied for. The
APR takes into account not only the interest rate, but also the
points, mortgage broker fees and certain other fees that are
associated with your loan. Also,
ask if your loan will have a charge or a fee for paying all or part of
the loan before payment is due (prepayment penalty).
A
lender may require you to obtain certain settlement services, such as
a new survey, mortgage insurance or title insurance.
It may also order and charge you for other settlement-related
services, such as the appraisal or credit report.
A lender may also charge other fees, such as fees for loan
processing, document preparation, underwriting, flood certification or
an application fee. You
may wish to ask for an estimate of fees and settlement costs before
choosing a lender. Some
lenders offer no cost or no point loans but normally cover these fees
or costs by charging a higher interest rate.
If
you see advertisements for lenders offering extremely low rates, don't
be misled. Most of the
time these very low rates refer to the starting rate on an adjustable
rate mortgage or graduated payment mortgage.
In other cases, the rate advertised may be for a balloon loan.
This is a loan where the remaining balance will have to be paid
off early. An example of
this is called a 30 due in 5. In this type of loan your payments are
based on a 30-year term to make them affordable.
The remaining balance of the loan however, must be paid off at
the end of the 5th year.
This means that you will probably have to refinance the loan or
sell the house at the end of 5 years to satisfy the debt.
Locking in your rate or point at the time of application or
during the processing of your loan will keep the rate and/or points
from changing until settlement or closing.
Ask if there is a fee to lock-in the rate and whether the fee
reduces the amount you have to pay for points.
Find out how long the lock-in is good, what happens if it
expires and whether the lock-in fee is refundable if your application
is rejected.
Finding
financing that you can live with for the next 30 years in serious
business. Ask about
alternative kinds of mortgages in your area. Compare rates, down payments, and closing costs
among different types of lenders.
Here is where a Certified Loan Broker can save you time and
money. There is no single nationwide mortgage rate;
interest rates can vary according to the amount of the mortgage, the
length of the loan and from lender to lender.
Look at the entire package that's being offered, including the
fine print about penalties and assumptions.
The more knowledgeable you are about the loan process, there
will be fewer surprises in store for you at closing.