When it comes to getting or refinancing a mortgage, little things can turn into big bucks quickly.
For example, small differences in interest rates can mean thousands (even tens of thousands) of dollars in additional interest charges over the life of the loan. Or, a slight difference in rates among different loans can signal fees that can mean hundreds or thousands of dollars in hidden costs. "I've literally seen differences of $5,000 in fees (between various loans)," says David Ginsburg, president of LoanTech.com.
When you are quoted a mortgage rate online or verbally, the lender must disclose an annual percentage rate (APR). There is usually a difference between the APR and the interest rate, because the former takes into account interest plus additional costs. As the Consumer Financial Protection Bureau explains:
An annual percentage rate is a broader measure of the cost to you of borrowing money. The APR reflects not only the interest rate but also the points, mortgage broker fees, and other charges that you have to pay to get the loan. For that reason, your APR is usually higher than your interest rate.
Comparing interest rates, APRs and fees can be confusing, and it can be tough to choose among various loans. And sometimes what may seem like a better deal may not be, depending on your individual situation.
Let's say you are getting or refinancing a $250,000 mortgage loan for 30 years. You are quoted three APRs:
- 3.931% APR (interest rate 3.875%)
- 4.078% APR (interest rate 4%)
- 4.157% APR (interest rate 4.125%)
If you're like most of us, you'll probably assume the lowest APR is the no-brainer right?
Not so fast. In this example, the lower APR loan carries higher fees. Here's how the fees shake out when these quotes are analyzed using Loantech's My Loan Cost Calculator, which compares and evaluates different loan options based on the consumer's goals (minimize fees, payments, payoffs, or total interest and fees):
- 3.931% = fees of $1,694 (monthly payment: $1,175.59)
- 4.078% = fees of $2,338 (monthly payment: $1,193.54)
- 4.157% = fees of $956 (monthly payment $1,211.62)
In this example, the loan with the highest APR has the lowest fees. The lower APR is still the cheapest loan overall, but when you're comparing mortgage rates, you'll want to also take into account how long you plan to keep the loan. Paying higher fees on a loan with a lower APR may make sense when you plan to keep a loan long enough to break even on the fees.
5 Fees to Look For
What kind of fees are we talking about here? Fees that may affect the APR include:
- Loan origination fee
- Lender fee (formerly known as discount fee)
- Lock fee or commitment fee
- Underwriting fee
- Processing fee
Some fees can be negotiated down or even away, but you won't know if you don't ask. And that means understanding how much you are being charged in fees in the first place.
Of course, as with any loan the best deals typically go to consumers with good credit scores. The differences are especially stark in the case of mortgages, where the interest over 10, 20 or 30 years can really add up. For example, in the options above, the total cost (interest and fees) of these loans after 10 years is:
- 3.931% = $88,889
- 4.078% = $92,523
- 4.157% = $94,139
Securing the lower APR loan saves a borrower more than $5,000 10 years into the loan in this example.
If you're going to get a mortgage the smart thing to do is to understand where you stand with your credit (you can get two free credit scores at Credit.com updated monthly), compare the cost of fees along with APRs when getting rate quotes, and understand the lifetime cost of debt. Together, these steps can help you make a smarter decision when you borrow.
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