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| Lowest Mortgage Rate Is Not Always The Best Rate With mortgage rates at record lows, banks and mortgage lenders are trying their best to gets more business. Low rates are advertised on TV, the internet and in the print media. But what is behind the numbers? Comparing one rate against another is a trap because it doesn't tell the whole story. In order to compare two offers you should use the Annual Percentage Rate (APR). Other costs that you have to pay are included in the APR. Therefore, it brings you as close as possible to the "true cost of borrowing". The APR is widely used by lenders, but it has three main drawbacks. >>> Number one, it doesn't include all the fees. For example, the credit report, the title fee and the appraisal are generally excluded. >>> Number two, it can only be used for fixed rate mortgages, not adjustable rate mortgages. Because no one can predict how the rate will change over time, we have to guess if we are trying to calculate for an ARM. Many times we are wrong. >>> Number three, the APR assumes that you will keep the mortgage for the full term, 30 years or whatever is in the mortgage document. However, in real life this seldom happens. Some homeowners are ready to refinance five years later, or even sooner. When you factor in the closing costs, a low APR could be very misleading. It gets very confusing for the borrower when he tries to use discount points. Discount points is a way of buying down your mortgage rate. For example, you might be quoted a rate of 5.0%. You can buy the rate down to 4.50% by paying the discount points. One point usually brings the rate down 0.25%. In this example the borrower needs 2 points. If the loan were for $200,000 the borrower would have to pay 2% of $200,000 or $4,000. In the following example the mortgage amount is $200,000 and the term is 30 years. The rates quoted are very close. Therefore you have to focus on the discount points and on the closing fees. These two factors will ultimately decide the best deal for you. Buying down the interest rate is generally the best option. The more you buy down the more the lender should give you. Do your best to get the closing fees waived or substantially reduced. In our example "B" is the best deal. Our borrower paid $4,000 for the privilege of buying down the rate from 5.0% to 4.5%. At the same time he was able negotiate closing fees of only $1,250. The end result was an APR of 4.89%. |
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