When you are shopping for your mortgage loan you will come across several terms you might not understand. And because the biggest financial decision ever been made by you is a mortgage loan, it is important to understand all those terms. And you should understand them before signing any papers.
So What is Meant with Rates, Fees and Points?
The mortgage loan interest rates are advertised in form of an APR by most credit unions, banks or other financial institutions. APR stands for an annual percentage rate. According to the law this interest rate must not only include the original interest rate but also all the fees you are required to pay.
That way financial institutions are kept away from advertising extremely low interest rates and then tacking on a bunch of fees just to make up for the low interest rate. Rate loans are available as both fixed rate loans and adjustable rate loans. You lender is the best person to discuss with to find out which type of interest rate suits your situation best.
But even though banks are required to advertise their rates including all their fees it is best to shop around a bit to find the best deal. And the lowest interest rate is not always the best deal!
As already said there are fees to be paid besides the interest payments when taking out a loan. These fees are known as closing costs and mean that you will have to pay multiple fees for the work the lender does for the loan. There are origination fees and probable a fee to bey paid to have your new home assed.
If you decide to do these fee payments upfront you probably end up with a lower than advertised interest rate. It is best to pay these fees off upfront instead of adding them to your loan amount if you can afford it. In the long run it will cost you double due to interest if you add them to your loan amount.
There are some lenders running on a points system and you should know what to expect with them. These lenders will probably tell you to pay points when they give you a good faith estimate. These points are simply money you are required to pay at closing.
One point is an equivalent to one percent of the mortgage loan. For example, if you are going to be borrowing $200,000 you would have to pay $2,000 in order to pay one point. Some lenders require their borrowers to pay points and some do not mess with this system.
When you are paying points ahead of time you will get a discount on your interest rate. And the more points you are paying ahead of the time the better your interest rate will be. If your bank isn’t working on a points system you can always make a down payment to lower the total amount of the loan. Sometimes you will get a lower interest rate because of a down payment too.
But no matter which system your potential lenders incorporate, always remember to talk to multiple financial institutions when shopping for a mortgage loan. This is the best way to compare mortgage rates, mortgage fees and mortgage points.