How To Lower Your Interest Rate
There is a direct relationship between mortgage rates and fees. You can pay more to obtain a lower mortgage rate. This is known as "buying your mortgage rate lower" or "paying a point." Let's review these terms and discuss how to understand loan rates.
Rate Quote Basics
A mortgage rate quote will include both rates and fees. Many initial quotes are provided via email or online. Once you have submitted a complete loan application, the quote will be formalized into a federally required form called a Loan Estimate.
A loan quote will let you know what type of loan you're getting (fixed or adjustable-rate), how much it will cost, and the interest rate.
In the loan quote, you must include the annual percentage rate (APR). This calculation will show you how much you'll be paying for the rate. If the APR is higher than.125%, the fees will be normal and expected. However, higher fees will be charged for APRs higher than the quoted rate by more than.125%. This could include a rate reduction. In either case, you should request a breakdown by line item of the fees.
To get a lower rate, you can either "buy your rates down" or "pay points." This fee is also known as the origination fee or points on your loan quotation. This fee is a percentage of the loan amount. It also includes other fees like title insurance, appraisal, credit report, credit reporting, and credit report. (For more information, see the ).
There may be two options for a quote: one with points and one without. For example, the quote without points may show a rate of 4 percent if you're looking for a 30-year fixed-rate loan at a rate of 4.25 % and 1.5%, respectively.
In this example, the points would be $3,000 as they equal 1% of the loan amount. These $3,000 fees can be added to any other fees.
The rate at which you pay is reduced by.25 percent. This reduces your monthly payments by $44 and lowers interest costs by $62.50 per month.
Would It Make Sense To Lower Your Rate?
Calculating how long it takes for your monthly savings to pay off your points is a great way to decide if you should buy down your rate or not.
This shows that $3,000 can lead to monthly interest cost savings in the range of $62.50. However, divide $3,000 by $62.50, and you will find that it takes 48 months or four years to repay the points.
A 30-year fixed loan will break even after four years. This means you'll have many years to enjoy the lower interest rate after breakeven.
You would not benefit from the lower rate if there was a 4-year breakeven period on a 5-year ARM loan.
This will allow you to determine if buying down your rate is a good idea.
You may get a lower rate by paying 1 percent interest on the loan amount. Ask your lender about buying points or paying points to lower the rate. These options will allow you to determine a breakeven point.
How Do I Get And Read Loan Quotes?
A complete loan application includes six items:
Name
Address to the property
Home value estimate
Income
The loan amount
Your Social Security number (used to obtain your credit scores)
Your lender will give you a loan estimate document within three days after submitting your complete loan application.
Page 2 of the Loan Estimate lists points in the section called Loan Costs. This section will show the exact percentage of points included in the loan amount. This section also shows the dollar amount of the points.
These numbers are what you would use for your breakeven.
On page 2, you can see all line-item charges that will be charged for your loan. This will give you an accurate picture of the transaction before you move forward.
