Mortgage Shopping: Rates vs. Closing Costs & Other Fees

As a mortgage advisor, the first question I usually receive from prospective borrowers is "What is your interest rate for a (30 or 15-year fixed, etc.)?"  If you are shopping for a mortgage and you are asking this question to lenders, the question you should be asking is this:

(1) What is your rate and...

(2) what are the closing costs associated with this rate?"

Let me explain the purpose of this 2-part question.  We'll consider a 30-year fixed rate loan program for this illustration.

First, it's important to know that you as the borrower aren't simply borrowing money. When you get a mortgage you are really "buying" an interest rate.  You can really get any rate you want within a range.  It's simply a matter of how much you are willing to pay for the rate.

Bottom line?  The lower the rate, the more you will need to pay for that rate in terms of closing costs.  (We'll discuss this in greater depth in my next blog post.)

Next, let's take a peek at the mortgage officer's desk.  A mortgage officer has a rate sheet that will list a range of rates that looks something like the following:

Interest Rate	Price
4.125%	(0.500)
4.250%	0.000
4.375%	1.000

What the Price (a.k.a "points") column shows is simply how much of a "premium" or "discount" the rate is worth (or costs) to the lender:

• A price above 0 means the lender receives a premium, or "bonus" if you will, for selling that rate.
• A price below 0 represents the "discount" meaning the lender (or the borrower) will need to fork up some dollars to sell this discounted rate.
• A price of 0 is the "par" rate, meaning there is no discount or premium paid or received by the lender.

Each point represents 1% of the loan amount.  So, if you the borrower opts for the 4.125% rate, you can expect to pay 1/2% of the loan amount for this rate, unless the lender is willing to eat this amount.  However, 1/2% of any loan size will more than likely eat up the lender's commission, so don't count on the latter.

On the other hand if you opt for the higher rate of 4.375%, the lender now has a premium of 1% of the loan amount.  By law, the mortgage officer can not be paid on this premium, but she can apply it to the borrower's settlement charges (i.e. closing costs and other fees).  Hence, the total fees charged to the borrower will be reduced.

Rule of Thumb: the lower the rate, the higher the fees, and vice versa.

My next posting will discuss closing costs and other settlement charges in greater depth. Feel free to pauljanofsky@certuswealth.com.