Rates, Points, and Closing Costs

Rates, Points and Closing Costs
by Steve Meyers
Re-written March 24th 2016

When contemplating purchasing a home and looking at financing alternatives, it’s imperative that you meet, in-person, with a qualified lender to determine what type of loan will be available to you, and what loan amount you will be approved for by the lender.  You should also understand that each lender may have a different set of costs that they will/may charge to lend you money.  These could vary from 1% to 3% of the loan amount and, be hidden in a number of different “fee” categories.  It can be quite confusing but, by understanding where they may include fees/charges, you should be able to understand the cost the lender is charging you to place/fund your loan.

Interest Rates – Selecting the lender who claims to have the lowest interest rates may cost you more money, rather than save you money.  Which lender would you select out of these three?

Lender A:  4.25 % interest rate, 30 year loan, 5% down payment, ¾  points, $3,000 in closing costs.

Lender B:  4.25% interest rate, 30 year loan, 5% down payment, 1.0 points, $2,500 in closing costs.

Lender C:  4.50% interest rate, 30 year loan, 5% down payment, 1.5 points, $1,700 in closing costs.

What are “points”?  “One Point” is equal to 1% of the original loan balance.  If you’re borrowing $250,000, “One Point” would equal $2,500 in costs at closing that the lender is charging to fund the loan.  Lenders may call this a “Lender Fee”, a “Discount Point”, an “Origination Fee”, etc., or any combination of the above.

What other category should a borrower look at to make sure the lender isn’t increasing his profits or, offsetting a lower quote on the “points” they are charging?  In the example above, “Lender B” may quote the loan with ½  points but, the closing costs may rise to $3,500, because he will increase his  underwriting fee by $1,000.  Now, which of the three lenders has the best deal.

What are “Closing Costs”?  Many of the “Closing Costs” should be pretty standard by all lenders.  Some of those would include; appraisal fee, credit report fee, tax service fee, settlement/escrow fee, title insurance cost, flood certificate fee, lender courier fee, wire transfer fee, etc.  But, some “Closing Costs” that are charged by the lender, are less standard, and should be looked at more closely for comparing lenders.  Those would include; origination fee, discount points, points, underwriting fees, etc.

My advice for you is to meet with, and interview, several lenders before selecting one lender that you feel comfortable with to do the best job he/she will do on your behalf, and charge you a reasonable fee to fund/place the loan.  Understand that the residential mortgage lending process has tightened in recent years and gaining a loan will take some effort on your part to satisfy the underwriting departments at every mortgage lender.

Have fun and good luck with your purchase.  If I can help you in any way or if you have questions or comments about this article, please email me at smeyers@kw.com.  Steve Meyers,  Managing Broker, Keller Williams Greater Seattle. (206) 972-3328

Information in this article was supplied, in part, by Dan Blair, HomeStreet Bank.  You can contact Dan directly at dan.blair@homestreet.com.    (206) 354-6967

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