How to Compare Interest Rates and Points When Shopping for a Mortgage

A good-looking mortgage can turn ugly if you are not careful in getting the best interest rates and points that are attached to the loan. In case you are new to shopping for a mortgage, an interest rate is the annual price that a lender charges you to borrow money from them. Usually interest rates are expressed as a percentage. Points are the upfront fees that you pay to a broker or lender for your loan.

Interest rates and points are often interdependent. With many lenders, your interest rates can be reduced if you pay more in points and vice versa. Yet, while most people are adamant about getting the best interest rates, they often drop the ball when it comes to comparing points. Each point typically equals one percent of the loan amount.

Comparing Points

The first thing that you need to know about comparing points is that there are two main types of mortgage points. These are discount points and origination points. Discount points are seen as prepaid interest because discount points are the amount paid at a specific interest rate. Although most borrowers can choose the amount of discount points they wish to pay, most lenders require you to have at least four discount points.

Origination points are often non-negotiable and are usually seen as lender fees. Because discount points directly lower the amount of your loan, they are tax deductible. Origination points, on the other hand, are not. Discount points can also be paid by the seller of the home, the buyer, or in some cases both the seller and buyer and can pay a portion of these points or split them in half. Origination points are usually paid by the borrower. Another key difference is that discount points are often paid at closing. Yet, origination points are normally paid before closing.

When comparing mortgage points, look for mortgage options that have the least amount of origination points. However, before settling in on points, you should definitely consider the short term and long-term benefits. While the short-term benefit of having the least amount of points will save you some upfront cash, the lowered monthly payments may be a better long-term benefit of having more points. It is important to have an idea of how long you plan to be in the house, and what works best for your situation.

Comparing Interest Rates

Comparing interest rates can be a bit trickier. Simply put, interest rates change daily and could even change several times within the same day. Therefore, the first rule of comparing interest rates between different lenders is to make sure you compare the lenders at the same interest rate.

In addition, it is important that you pay close attention to the lock in periods that the lenders offer. These periods are the amount of time that lenders guarantee the interest rates and points that they quote to you. Common lock-in periods are of 15, 30, 45, 60, and 90 days. Lock-in periods are important because they are the interest rate that the lender offers, regardless of how high or low interest rates become during this specific period. Usually, the higher priced loans are associated with longer lock in periods.