Low interest rate vs low closing costs. What is best?

Minneapolis, MN:  As a 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 isn’t 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

For example, FHA guidelines are FHA guidelines no 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 don’t just make up rates. Today’s 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 don’t work for free. Anyone claiming they don’t charge a normal cost, no lender fees, or things like free appraisal are making up up somewhere else.

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 today’s 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 option.

NO LOAN ORIGINATION FEE QUOTE

The mortgage loan interest rate quote is based on today’s 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 today’s 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 today’s 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 “What is your interest rate.” 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.

More information on How to Shop Interest Rates

BEWARE OF LOW QUOTING TRICKS

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 off low.

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.

If you 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 don’t have the money, this may be a good option.

The next 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 – which saves them a lot of money over the long haul.

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Mortgage broker in MN, WI, SD

Ready to apply for a home loan?  For home mortgage loans in MN, WI, and SD, just click here to get started. If in another state, we suggest contacting a local mortgage broker in your area for the best deals and options. Joe Metzler, NMLS #274132. Equal Housing Lender. Not an offer to enter into an interest rate lock agreement.


Refinance your upside down mortgage while rates are low

Just when you considered housing loan rates could not go down anymore, they have strike record low levels once again this week, and every homeowner should take other look at their stream situation.

Homeowners refinance for many not similar reasons. Some wish to lower their payments. Some wish to shorten the life of their mortgage. Some wish to obtain some cash out. Some wish to pay off a Home Equity Line of Credit.

There are still great mortgage programs available in today’s market. One of those allows homeowners who have lost value to still refinance in to a descend rate. Freddie Mac and Fannie Mae have allow homeowners to refinance, even if they owe up to 125 percent of the appraised value of their home. It is estimated that more than 25 percent of homeowners in the U.S. owe more than their home is worth.

However, only Freddie Mac and Fannie Mae allow for the 125 percent limit, many banks and housing loan companies only enable homeowners to refinance if they owe up to or reduction than 105 percent of the value of their home (including us). Of course, all your standard other requirements still apply (debt-to-income ratios, credit scores, etc).

Click here to see who really holds your loan (it usually isn’t who you make payment to).

Homeowners who have a second mortgage can also refinance, but no cash is allowed.

There are many factors to ponder if a refinance makes sense. One is closing costs. Many people take a NO COST loan, but we suggest you not agree to a “no cost” loan unless you entirely comprehend the differences between a standard “cost” loan and the “no cost” loan. Neither option is right or wrong, but you can pay dearly for selecting the wrong one for your individual situation.