In Part I, we discussed the components of the loan that do not require lenders' quotes. The following components of the loan, including interest rate, points, and closing costs can get pretty involved and you will probably need to discuss the different loan options with a mortgage lender. Each lender will have different rates and fees, so I call around to a couple lenders and compare.
5. Interest Rate:
The interest rate is variable depending on your credit score, income, and loan type. The higher the credit score, the better the rate. Lenders have cut-offs for what they consider above average, average, and low. If you can be in the above-average group, they will get the best rates. Your income comes into play when they figure your debt-to-income ratio. This is basically a way to measure how much you are bringing in and how much you are spending. At some point, a lender will not create more debt for you than they think you can handle. One thing to consider about your debt is not what the lender says you can handle but what you want to handle. The loan type also has a heavy influence on your rate. A better rate is given to those who will owner occupy the property.
6. Points:
Points are paid by the Borrower in order to buy down the interest rate. If you get some insanely low interest rate from one lender that seems completely out of whack from the other quotes, this might be because they are quoting you a rate with points. A point is equal to 1% of the loan amount, and you pay this point as part of your closing costs. So for example, with a loan for $240,000, one point would be $2,400 and that point might buy your interest rate of 6.5% down to 6.25%. Buying down your rate will lower your monthly payment.
When comparing lenders, make sure they all quote you a rate with no points. This levels the playing field so that you can determine who has the best rate without having to do all kinds of crazy calculations.
7. Closing Costs:
In addition to points, the Borrower pays 2-3% in loan-related closing costs. The majority of closing costs are lender fees. To demonstrate the price you pay for borrowing money, if you pay cash for a property, the closing costs ends up being more like $300 instead of $6,000 for a $300,000 sales price. The fees you pay include loan origination fees, appraisal fee, lawyer fees, credit score application fee, and document preparation fees.
Ok, so those are the main components of the loan to sort through and compare. Now, the toughest part is to compare lenders and weigh out all the closing costs and points paid along with the interest rates. How do you compare one lender with a 6.5% interest rate with $5,000 in closing costs to another lender who has a 6.0% rate with $8,000 in closing costs? The rate is better but you are paying more for it at closing, so is that $3,000 extra really worth it? To compare this, the lender can provide you with the Annual Percentage Rate (APR), which is the interest rate calculated with closing costs wrapped into it. As long as you are comparing two exact same loan lifes and are putting the same amount down, the APR is the easiest way to determine who has the better overall package.
Ki Gray works in Austin Texas as a real estate agent. His website provides information on the Austin Condos coming up in the Austin Real Estate market along with a free search of the Austin MLS. If you are interested in the moving to Austin check out Escapeso Austin Real Estate.
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