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Shopping around for Mortgages: Is It worth It?

Harry Coleman

Spring Selling Season Is Here: What Homebuyers Need to Know

(Continued from Prior Part)

Shopping

Homebuyers need to be smart when shopping for mortgages. To combat rising home prices in the United States, it’s crucial that potential buyers shop around for the best deals.

The above table illustrates the interest rates, monthly payments, and associated fees for a loan of $330,000 with a 20% down payment for a home in Los Angeles, where the customer has a credit score of over 740. As seen above, some of the providers carry high fees, but the APR (annualized percentage rate) offered is quite low.

The lender with the highest fees has the lowest APR and the lowest monthly payments. Comparatively, the lender with $751 in fees has a slightly higher APR, leading to an increase of $13 per month, or $156 per year, in repayments. Therefore, a buyer will need to make a choice depending on how much money is being saved, or earned, in the long run.

The second option, with $751 in fees and $1,482 monthly payments, will help save almost $900 in upfront fees, but increase payments by $13 a month, or $156 a year, for 30 years. Considering this, the present value of the $156 annual payments needs to be calculated. Assuming that the extra monthly cost that the buyer is incurring for lower fees was discounted at 10%, which is the historical return of the S&P 500, the present value of the total outlay would be $1,617 if payments are made at the beginning of each year.

With the savings of almost $900 being eliminated in this case, the second option would more expensive by $717 ($1,617 minus $900) considering the present value of future outflows. However, if the buyer opts for the option with the most expensive fees and instead invests $156 a year in the S&P 500 with projected annual returns of 10%, then the corpus at the end of 30 years would be in excess of $28,000 if the money was invested at the beginning of the year. Therefore, savings on the monthly outlay can be used to invest in index funds and build wealth.

In the long run

To combat rising home prices in the United States, it is undoubtedly important for potential buyers to hunt for the best deals on the market. However, more importantly, homebuyers need to look beyond the fees and rates being offered by different providers, as money saved on monthly payments can be used for investment purposes and building wealth in the long run.

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