The best rate is
the lowest rate.
True or False?
Life would be easier if the answer
was "True". We'd only have one rate to talk
about for each loan program. But it's not that simple.
Here's the reason: Mortgage
Companies sell money just like other businesses sell products. They
have to cover the cost of doing business, among those costs
are:
- Cost
of the money lent
- Employment costs
- Overhead
Not very mysterious, is it?
Mortgage Companies earn money through
basically two avenues:
- charges during the loan process. This
generally takes the form of an origination fee.
- Interest earned over time on the
loan or prepaid in the form of discount points
Discount
points are fees paid up front that are used to
lower the interest rate. It’s like pre-paying the interest
on your loan in one lump sum to save money every month
you keep the loan. The more discount points you pay, the lower
your rate will be. The
trouble is, it takes about 5 - 7 years to recoup the
money you pay to lower the rate. So if you don’t plan
on keeping the property very long (or you think you might
refinance), it doesn’t pay to pay points.
Both
origination and discount points are expressed as a percentage
of the total loan amount. For instance, one point is equal
to 1% of the loan amount. On a $100,000 loan one point
would equal $1,000.
So when should I pay points to lower
my rate?
Pay points when
- The Seller is willing to pay them
- Your company will pay them (relocation
packages)
- You plan on keeping the property
more than about 7 years
- You need the lowest rate for qualifying
purposes
Avoid paying points when
- You need all the cash you have to
pay off bills to qualify
- You're short on cash reserves or
cash to close
- You don't intend on keeping the property
for more than about 7 years
- You think you might refinance within
the next 7 years
“No
Origination” and “No Closing Cost” options
At Southeastern
Mortgage Solutions we also offer no “origination fee” and “no
closing cost” loans. Terms and rates on these type of
programs depend on many factors including credit situation
and loan amount. Generally speaking the interest rates
on these loans will be higher than traditional mortgages. Your
Southeastern Mortgage Solutions loan specialist will be
happy to lead you through both options to decide which
is beneficial to you.
When
should I choose a no “origination fee” or “no closing
cost” loan?
These loans are beneficial in many circumstances
such as:
- little
or no money to pay for closing costs when purchasing
a home
- little
or no equity available to roll the costs in when refinancing
a home
For
example:
A
couple is buying their first home and they have $5,000
total available to use in the transaction. They qualify
for 95% loan (up to 95% of the purchase price). The selling
price is $100,000. This gives them a loan for $95,000
and leaves them with a down payment of $5,000. With a
traditional loan they would be left with the task of coming
up with the additional funds needed to pay the closing
costs associated with the loan. However, with a Southeastern
Mortgage Solutions no closing cost loan those charges would
be paid by SMS. As mentioned before the interest rate
would be slightly higher than a traditional loan, but the
couple is able to buy a house they could not have otherwise
As you can see there is more to picking
a rate than the “Lowest One”.
While this is an important decision
to make, you can always change your mind later on, when
your loan is in processing. Just let us know in plenty
of time so we can make the appropriate changes to your
application.
|
