Interest Rate or Lowest Closing Costs? Plus NO Lender Fee,
NO Closing Costs, No Origination Fee Mortgages. How do they all work?
are a Direct Lender
We fund and close our own loans
A common mistake mortgage loan shoppers make is to ask:
"What's your lowest interest rate?" or "What are your closing
Both logical questions to ask, but they do not give
the response most borrowers need to make a proper decision.
Borrowers must understand both interest rates and closing costs, and how they
interact with each other. Interest rates are only
half the answer to getting the best mortgage deal. It is possible end up
with a low rate, or with low or no closing costs, but not necessarily the best deal.
First understand that all lenders have
essentially the exact same third party closing costs to do your mortgage loan.
This includes appraisal, credit report, state taxes, county
recording fees, title company charges, etc. Mortgage companies also have
to pay the same loan officers, underwriters, processors, and back office staff,
so they all need to charge origination fees, processing fees, etc.
So if all lenders have essentially the same costs to obtain,
process, and close your mortgage loan, how can one lender do it cheaper then the
next? The answer is they can't. Remember that
nothing is ever free. Lenders simply use "reverse points" whenever they claim to
offer any sort of no origination, no closing costs, or lower closing cost
put, the lowest rate & the lowest fees do not go
hand-in-hand. NO LENDER can offer both together. I can give you the
lowest interest rates, but it will cost you in higher
closing costs. I can give you the lower closing
costs, but lenders make it up by charging a higher 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 ("standard" in
the example below).
Interest Rate versus Closing Cost Comparison
is an example of Rate vs. Costs on a $200,000 - 30 year fixed loan
(Note: Not actual rates)
P & I Payment
Years of Interest
Years of Interest
Years of Interest
Mortgage Loan Officer for over 20-years, I am constantly asked the same two main
questions. What is your interest rate, or what are your closing costs? The
answer isnít actually very simple. Low interest rate vs low closing costs, and
what is best for you depends on many factors.
Interest Rate and Closing Costs Education
The first thing to understand is that for the most part, all lenders, regardless
of them being a bank, broker, or actual mortgage company all do the same thing,
have the same rates, and same costs
example, FHA guidelines areFHA
guidelinesno matter who you get your loan from. If your
situation puts you on the far fringe of a programs guidelines, you may run into
lenders have have an individual company risk overlay, but I am speaking about
the vast majority of loan applicants.
We all get our base interest rates based on the same mortgage backed security
bond market. If my rates go up, so do theirs. If my rates go down, so do
theirs. Lenders donít just make up rates. Todayís bond market plus our margin
equal todays rates
We all have the same REAL closing costs, most of which are not actually the
lenders costs. Appraisal, credit report, title company, state deed taxes, county
recording fees, and initial pre-paid items of taxes and insurance are all the
same, or so close as to not make a difference no matter who you deal with.
We all also donít work for free. Anyone claiming they donít charge a normal
cost, no lender fees, or things like free appraisal are making up up somewhere
Interest rates can vary based on many items, including loan program, credit
score, state, property type, and down payment size. because of this, my opinion
is most instant online interest rate quotes are worthless.
Different Interest Rate Quote Techniques
Differences in standard quoting techniques are everywhere, and super confusion
to most home buyers. There are four main interest rate and closing cost options.
Understanding all four makes you a better shopper.
STANDARD RATE QUOTE:
The traditional mortgage loan interest rate quote is based on todayís lowest
rate for your situation, combined with you paying all standard and traditional
closing costs. There are no discounted cost, no free appraisals, and no discount
points to artificially buy down the rate. This is the most commonly quoted
NO LOAN ORIGINATION FEE QUOTE
The mortgage loan interest rate quote is based on todayís lowest rate for your
situation, combined with you paying all standard and traditional closing costs,
EXCEPT the lender does not charge you the standard 1% loan origination fee.
Sounds great, but no lender works for free. The no loan origination is achieved
by increasing your loans interest rate by typically 0.25%. The actual amount
will vary based on program and loan size. This is the second most popular
interest rate quote.
LOW RATE WITH DISCOUNT POINTS QUOTE
This option is based on todayís base rate for your situation, combined with you
paying all standard and traditional closing costs, PLUS additional closing costs
known as discount points to buy down your interest rate. For example, maybe you
pay an addtional 1% of the purchase price in closing costs today, and this may
get you and interest rate 0.25% lower. The amount of points you pay, and the
actual rate change will vary based on program and loan size. This option is
highly quoted on internet rate quote comparison sites.
NO CLOSING COST QUOTE
The mortgage loan interest rate quote is based on todayís base rate for your
situation, but where you typically do not pay any loan closing costs, except for
any initial escrow account set-up costs, like pro-rated property taxes and
insurance. Again, there is no such thing as no costs, they just hide the costs
in a higher interest rate. The actual increase inthe interest rate will vary
based on loan size, and dollar amount of real costs the lender needs to bury
into the interest rate. It is not uncommon to see interest rates 0.50% to 0.75%
about the standard quote rate.
HOW TO SHOP INTEREST RATE OFFERS?
Most people call and ask ďWhat is your interest rate.Ē A good question, but
based on the various quoting techniques, can leave you with confusing answers
for comparison purposes.
I usually advise people to PICK on of the offer options, then when contacting
lenders, be sure to tell each lender you desire the same type of quote. Standard
offer vs Standard offer, or no origination versus no origination.
Another good tool is to ask based on a hard closing costs number. Ask everyone
for a quote based on closing costs being $7,000 for ecample. Then the only
difference is interest rate.
Since the real estate collapse in 2007, rules and regulations have been improved
dramatically, but there are still common tricks. The current biggest being under
quoting pre-paid items of taxes and insurance.
I recently quoted a client estimated home owners insurance of $1,400 for the
year. The competition quoted $700 for the year. Needless to say, the client was
thrilled with the $700 cheaper quote, and wanted to go with the competitor.
I informed the client that this was just our guessing, and that whatever his
insurance policy premium actually cost, would simply be passed on and adjusted
in his final numbers.
I also informed him that while a guess, we are supposed to be as accurate as
possible, and that maybe he should hand up and call his insurance agent.
His actual quote was $1290. So I was a little high, but the competition was way
Low interest rate vs low closing costs. What is best?
There is no correct answer, and one is not better than another. Your answer lies
in your individual situation.
are a first
time home buyer who can barely come up with your down payment, you may opt
for the no loan origination fee, or the no
closing cost loan. Yes, your interest rate and payment will be higher, but
if you donít have the money, this may be a good option.
person may be selling their small first home, and buying their bigger forever
home. They may also be netting a nice profit. Therefore not only do they have
plenty of money for down payment and closing costs, they may also have plenty to
buy the interest rate down Ė which saves them a lot of money over the long haul.
WHICH LOAN VERSION is RIGHT FOR YOU? I can offer you all
four options on all most of our mortgage loan programs.
The combination of
rate & fees can be very confusing. One lender is screaming
"No closing costs." A second lender may quote you 5.25%
with $2246 in fees, while another lender is offering 5.00% 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.
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.
you are now smarter than everyone's brother, mother and sister
with a real estate license.