Mortgage Shopping Tips

Mortgage Shopping Tips
When shopping for a​ mortgage loan,​ every lender will have different rates,​ fees and points for each loan program .​
When shopping for a​ mortgage loan,​ it​ is​ important to​ understand the​ three components of​ a​ Rate and Fee Quote: (1) Premium Rates (2) Lender Fees and (3) Discount Points.
A Premium Rate offer is​ any interest rate above the​ market rate (referred to​ as​ the​ Par Rate) .​
While the​ Par Rate changes constantly during the​ day,​ most lenders will commit to​ a​ specific Par Rate early in​ the​ day .​
If the​ Par Rate is​ 6.00%,​ the​ lender will only earn revenue if​ they offer you​ a​ rate above Par (for example,​ 6.25%) .​

Lender fees are charged for services performed directly by the​ lender,​ which may include Processing Fees,​ Underwriting Fees,​ Origination Fees,​ etc .​
These fees are charged to​ offset the​ cost of​ processing,​ closing,​ and funding your mortgage loan .​
Discount Points often represent the​ largest fees associated with your mortgage loan as​ one point equals 1% of​ your loan amount .​
If you​ are applying for a​ loan amount of​ $350,​000 and pay 2 Discount Points,​ the​ Discount Point Fee would be $7,​000 .​
Borrowers may use Discount Points to​ obtain rates below the​ Par Rate .​
For example,​ if​ the​ Par Rate is​ 6.00%,​ a​ 5.75% rate would indicate that the​ Borrower will have to​ pay Discount Points.
Factors to​ Consider
Every lender provides multiple combinations of​ Rates,​ Fees,​ and Points across a​ variety of​ different programs .​
All of​ these choices can become overwhelming when trying to​ decide between different programs,​ rates,​ and fee packages .​
to​ limit the​ possibilities,​ it​ is​ often helpful to​ answer a​ few key questions:
How long do you​ expect to​ have this loan? Consider the​ probability of​ relocation,​ moving,​ or​ refinancing when determining your timeframe .​
Think in​ terms of​ 5 and 10 years .​
Do you​ have the​ available cash to​ pay additional fees now to​ lower the​ interest charges later? Be sure that paying upfront fees is​ the​ best use of​ your money .​
For example,​ paying higher fees or​ points for a​ lower rate may not be a​ good use of​ cash while carrying high credit card balances .​
If you​ expect to​ have the​ mortgage a​ long time,​ paying points to​ reduce the​ rate makes economic sense because you​ are going to​ enjoy the​ lower rate for a​ long time .​
If your time horizon is​ short,​ avoid points and pay the​ higher rate because you​ won't be paying it​ for long .​
If you​ plan to​ have your loan for 5 years,​ paying 1 Discount Point on​ a​ $350,​000 loan will cost you​ $3,​500 upfront while saving you​ $88 a​ month .​
After 40 months of​ savings,​ you​ have recovered your upfront cost and will benefit from the​ lower rate .​
If you​ stay in​ the​ loan for 10 years,​ you​ will have created an​ additional $7,​060 in​ interest savings over the​ life of​ your loan .​
Just like interest,​ points are 100% tax deductible in​ the​ year you​ pay them .​
The second factor is​ your opportunity cost .​
What could you​ do with the​ money if​ you​ didn't use it​ to​ pay points? Even if​ you​ expect to​ be in​ your house a​ long time,​ there could be other uses for your money that take precedence over the​ long-run savings from a​ lower interest rate .​
a​ useful way to​ pull these factors together is​ to​ look at​ the​ payment of​ points as​ an​ investment that yields a​ return that rises the​ longer you​ stay in​ your house.

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