When potential borrowers first think about getting a home loan, they typically start searching around for the prevalent mortgage rates. Then with the assistance of some online mortgage calculator, they can get an estimated payment on the principal and interest payment. (this however, should really be done with the assistance of a loan officer). There can be different ‘add-ons’ depending upon various factors such as credit history and loan amount and so on, but even still getting a handle on a monthly payment early on is very important. Your chosen mortgage lender will think the same.
When mortgage companies list their mortgage rates for the day, they will offer a range of rate choices for the very same loan program. Did you know that a mortgage company can offer multiple rates on the traditional 30-year fixed rate program? They can and do. This gives you and the lender some flexibility along with more choices. You might have thought that once you decided on a specific financing option you were pretty much done with the selection process but you’re not quite across the finish line just yet.
Okay, let’s use the 30-year loan program as an example. For instance, you start looking at various rates and see that maybe 5.00% is available with one discount point (a discount point is equal to 1.00% of the amount being borrowed) But you can get a rate of say 4.75% with two points. There’s a little math to be done here to help you decide which rate/point combo works best for you. Again, with a little help from your loan officer. But just as you can lower your rate by about 0.25% by paying $3,000 on a $300,000 mortgage, you can also raise your selected rate by 0.25% from 5.00% to 5.25% and pay zero points. But you can take that a step further.
Besides the chosen program and rate, there are closing costs to consider. All mortgage loans come with closing costs. You can’t get around that. It’s just a matter of who pays for them. Okay, so we all understand how a ‘no point’ loan works, right? It’s an upward adjustment to the rate. If you next select a rate even higher, there will be a lender credit available to you at the closing table. If you go from a 5.25% rate to 5.50%, there can be a lender credit given to you. In this example, the credit might be 1.00% of your loan amount. On a $300,000 loan, that works out to $3,000 towards a closing cost credit.
I’ve always liked this option. Of course, the size of the loan matters because the credit is based upon the size of the loan. For smaller loans, it might not make any sense. But with a little math between you and your loan officer, you just might come to the same conclusion as I do. I’m a fan.