When you are buying a house there are two parts. One of them is rather easy and one of them tends to confuse a lot of people. Even if you have to tour a number of homes to find one that suits both your needs and income it is still the easy part (and also the fun part). The harder and confusing part is shopping for mortgage loans. It is a large investment for anyone so you need to make a wise choice. When dealing with such a large amount spread over such a long time even the smallest numbers will add up and change the overall cost of the loan. By knowing the terms used, watching the often overlooked fees, and knowing a few hints can make mortgage loans make a lot more sense.
To start with, you need to know what a premium rate is. There are two interest rates in mortgage loans and home financing. There is the market rate and the premium rate. The market rate is what the loan will cost the bank. The premium rate is what they are going to charge you. If the market rate, sometimes called the Par rate, is 5%, the bank only makes money on what it charges above 5%. In other words, you would not expect a 4% premium when the Par rate is 5%. That would mean the loan is costing the bank 1%.
Next there are the fees. Banks never get sick of thinking up new ones but they cover the administrative cost of giving you the loan. There are processing fees, underwriting fees and the list goes on. If they are not addressed as such you can be quite sure that they have worked their way into the offer somewhere.
Finally there are the Points we always hear about when discussing mortgage loans. Discount Points are easy to understand but most people do not know how to use them to their advantage. 1 Point is a fee equal to 1% of the loan and are the largest fee the borrower pays. Often a lender can offer an interest rate that is below the Par rate by the charging higher points. Don’t worry, you can still make them work in your favor.
When the bank makes you their offer on the loan it is a mix of all these factors. Every lender does it their own way and this is why shopping for mortgage loans is important.
The best way to look at it is the length of time you plan to be in that house and paying that mortgage. Interest rates are more critical to people who plan on staying in the house longer. Because of that, it is generally best to pay higher points for a lower interest rate. The opposite is then true for the people who plan only to stay a shorter time, perhaps 5-10 years. Yes, they will pay a higher rate but it is for a short time so it does not hurt them as badly and they saved a lot of money to move in. That money might be better spent else where. Paying off higher interest credit cards or auto loans might be a good choice.