There are some basic guidelines you should follow when getting rate quotes to make sure you’re actually comparing apples and apples. For instance, you don’t want to compare rates from different lenders for a 30 year and a 15 year program. The 15 year rate will be lower than a 30 but the payments will also be higher. In addition, how long would the quoted rate be food for? 30 day locks are a bit more expensive than a 10 day, for example. And finally, and certainly just as important, compare not just the rate but the fees associated with getting that rate.
There are third party fees, which the lender won’t really have any control over, and there are lender fees. Third party fees would be something like an attorney fee or title insurance. A lender fee would be an underwriting fee, processing or document fee. These fees the lender does have some control over. Two of the fees quoted might also be confusing- a 1% point and a 1% origination fee. Are they the same, just different language or are they different?
They’re different.
A point, commonly referred to as a ‘discount point’ is expressed as a percentage of the amount borrowed. If the loan amount is $200,000, the 30 year rate at 4.00% with one point, the additional point would then be $2,000. Lenders offer various options among rate and fee combinations and quite frankly really don’t care if you pay any points or not as the net to the mortgage company is essentially the same.
If you pay one point on a 30 year loan the quoted rate might be 0.25% lower compared to a loan without any points. Conversely, that same rate with no points will be higher than the one with points. It’s completely up to you and your loan officer will be happy to provide you with a monthly payment and cost breakdown. In general, the longer you intend to keep the mortgage you may want to pay some in point to get the long term benefit. For short term financing options, don’t pay any points while also exploring a “no point, no fee” program. Again, points are expressed as a percentage.
So too are origination fees. An origination fee is a charge by the lender or broker for “originating” the new mortgage in the first place. The most expensive costs for lenders when finding and processing mortgage loans is the overhead of personnel. Loan officers spend time and money establishing a consistent referral base and at closing there could be a 1.00% origination fee. Of course, this fee should be disclosed to you early on in the Cost Estimate. But while both the point and origination fee are expressed as a percentage, they’re for two totally separate functions.
