How to Choose Between Low Rates and Low Points on a Mortgage
When a borrower is shopping around for a mortgage loan, a number of variables play into his final decision. A borrower has to decide which is more important: a low interest rate or low points. Points are fees charged to a borrower to lower the interest rate. Many borrowers erroneously believe that the only factor to consider is the monthly interest rate; however, the APR, or annual percentage rate, can help a borrower determine which mortgage option is the cheapest. The APR is the total cost of the loan for a full year, including both the monthly interest rate and the closing costs. Points are included in the closing costs.
- Difficulty:
- Moderate
Instructions
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1
Ask each lender you are considering for a copy of the Truth in Lending Statement and the Good Faith Estimate on each mortgage. Both documents outline the interest rate, the closing costs of the mortgage and the total interest expense of the mortgage. If points are being charged, they will be itemized on the Good Faith Estimate.
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2
Look at each Good Faith Estimate. This document will outline the total closing cost and the interest rate associated with each mortgage. Note the mortgage with the lowest closing cost, as well as the mortgage with the lowest interest rate.
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3
Analyze each Truth in Lending Statement. The first box on the left will contain the APR (annual percentage rate). The loan with the lowest APR is the lowest-cost loan for the first year. It may or may not be the loan with the lowest interest rate.
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4
Look at the last box on the right on the Truth in Lending Statement. This is the total of all payments, interest and principal on the loan as a whole. The loan with the lowest overall payments is the cheapest overall loan, excluding closing costs.
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5
Determine how long you are likely to hold the mortgage. If you're planning to hold the mortgage for 10 years or more, it's best to choose the loan with the cheapest overall payment, as found in the last box of the Truth in Lending Statement. But if you plan to move in the next few years, the loan with the lowest APR, as found in the first box on the Truth in Lending Statement, is probably the best option for you.
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Tips & Warnings
Remember that while the monthly interest rate is important, you may be paying for that low interest rate. That's why the APR is so important. The closing costs may vary a little from one loan to the next, but the APR will clearly tell you which mortgage is cheaper in the first year.
Nothing in the mortgage world is final until the closing table. Be sure to check the final Good Faith Estimate and Truth in Lending Statement on your mortgage at the closing table to ensure that it is the same as the original.
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