How to shop for a lower mortgage rate
Lower mortgage rate: not rocket surgery
At first it seems pretty simple: If you want a lower mortgage rate, you just check a few rate sheets, and the job is done and over. That sounds good, but the reality is that such an approach is likely to leave a lot of money on the table. Your money.
The problem with looking at interest rates alone is that a mortgage is a piece of complex financial engineering. It has a number of moving parts. If the interest rate is all you check, you could miss higher costs elsewhere in the transaction. If you really want to find lower rates, you have to look at more than the big type.Verify your new rate (Nov 19th, 2017)
First, we have the plain and simple, basic-as-dirt mortgage rate. If you borrow $150,000 at four percent over 30 years, your monthly principal and interest is $716.12. At 3.75 percent, the monthly payment falls to $694.67. The difference is $21.45 a month, or $257.40 a year. Over a decade you’ll save more than $2,500.
So yes, look for the lower rate – but don’t stop there.
Annual percentage rate (APR)
“An annual percentage rate,” says the Consumer Financial Protection Bureau, “reflects the mortgage interest rate and other charges.”
This means the interest charges and also the points, mortgage broker fees, and other charges that you have to pay to get the loan. That's why the APR is usually higher than the stated or advertised rate.
Let’s say it costs $5,000 in financing fees to originate the $150,000 mortgage at four percent. The APR incorporates both the interest charged and the additional $5,000. For this reason, the APR is higher than the interest rate. It's 4.27 percent in this example.
Hint: If you look at mortgage offers from two lenders, both at four percent, the one with the higher APR reflects steeper up-front costs. Same loan amount, same interest rate, different expenses.
The APR may look like a straightforward way to compare mortgage rates, because it includes both interest and financing costs. However, it's not foolproof. You calculate the APR by looking at the financing cost over the projected loan term: 30 years in our example. That makes sense as a theory but in practice it understates the real cost of the loan.
The reason the APR does not reflect the real cost of mortgage financing is that most borrowers sell or refinance long before the end of a 30-year term.
In 2016, the typical home sold after 10 years of ownership, according to the National Association of Realtors (NAR). The $150,000 example above has an APR of 4.27 over 30 years, but it's 4.70 percent if the loan is outstanding just 10 years.
Hint: Up-front fees and charges are relatively more expensive if the loan is outstanding a short time. That's because the fees are spread out over less time.
A lower mortgage rate
It might seem as though mortgage pricing should be as plainly marked as ice cream in a grocery store, but that isn’t the case. What we really need is a universal government form to plainly show mortgage rates….
There is actually such a form, the federal “Loan Estimate” or LE. Generally ,you must receive a copy from a lender within three business days of an offer to finance.
The Loan Estimate form plainly shows the interest rate in big type toward the top of the first page. The APR – for reasons which defy understanding – appears on the third page of a three-page form.
There is a value to the Loan Estimate form. It allows you to compare offers from different lenders. On page three, the loan’s cost after five years is shown. This is an especially useful piece of information -- either it is bigger or smaller than a competing offer.
Also on page three of the LE form is the Total Interest Percentage (TIP). This was developed by the Federal Bureau of Confusion and Blather (FBCB) in an effort to assure that mortgage costs are thoroughly unclear.
The Total Interest Percentage (TIP), says the Consumer Financial Protection Bureau, “tells you how much interest you will pay over the life of your mortgage loan, compared to the amount you borrowed.
"The total interest percentage is calculated by adding up all of the scheduled interest payments, then dividing the total by the loan amount to get a percentage. The calculation assumes that you will make all your payments as scheduled. The calculation also assumes that you will keep the loan for the entire loan term.
“For example, if you have a $100,000 loan and your TIP is 50 percent, that means that you will pay a total of $50,000 in interest over the life of the loan, in addition to repaying the $100,000 that you borrowed. If your TIP is 100 percent, that would mean that you will pay $100,000 in interest (100 percent of the $100,000 loan amount) over the life of the loan.”
Of course, the assumption that you will “keep the loan for the entire loan term” is unlikely – consider again that the typical home was sold after a decade of ownership in 2016, not 30 years. The result is that the TIP, whatever it measures, is a distraction for most borrowers.
What are today's mortgage rates?
Current mortgage rates are very, very low. And you can do even better when you pay attention to what's available, and compare offers from several lenders.
- First, check mortgage rates. Lower is better.
- Second, check the APR. Again, lower is what you want.
- Third, look at the Loan Estimate form and read the total expected cost for the first five years of the mortgage term.
As always, it pays to shop around, speak with different lenders, run the numbers, consider how long you might own a property, and look at Loan Estimate forms.Verify your new rate (Nov 19th, 2017)
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