Rising concerns over economic factors such as global growth and trade have driven mortgage rates below 4 percent, reaching a 21-month low. This has provoked a spike in the number of refinances, which account for 42.2% of all mortgage applications today.
Having helped dozens of clients through the mortgage-shopping process, and, having recently gone through it myself, I’ve identified several “fine print” items that often are overlooked by the average mortgage seeker. Here’s my list of what to be aware of, if you are purchasing a home or considering a refinance:
- Points. Don’t be fooled by a rate that is lower than the current competitive rate. Lenders can charge “points” to reduce the interest rate, which are added to the closing costs. A lower rate with points may or may not be in your interest. Just remember, don’t take the rate at face value without assessing the other costs.
- Origination Fees. Similar to points, origination fees are charged by the lender as part of their compensation, and are added to your closing costs. These fees can vary significantly from one lender to another. Some lenders will offset their origination fee with “lender credits”, which directly offset your closing costs. For origination fees, the lower the better. For lender credits, the higher the better. While a modest origination fee is not unreasonable, know that there is such a thing as zero origination fees, so don’t be afraid to ask for a discount.
- Private Mortgage Insurance. If your loan is for more than 80% of the home’s value, you will likely have to pay for Private Mortgage Insurance (PMI). Rates for PMI are largely dependent on your credit score, but can vary significantly from lender to lender. Additionally, oftentimes there are breaks in the rate for every 5% that the loan-to-value decreases. For example, if you are putting 4% down on a home purchase, consider the impact of adding an additional 1% to the down payment in favor of lowering the PMI rate.
- Personal Recommendations. When I bought my first home, my real estate agent had a list of loan officers that he recommended to help me with my mortgage. I was surprised to see that the rates of interest offered by these personal connections were as much as half a percent higher than the competitive rates at the time. While working with a trusted connection can add value, be sure that you’ve shopped separately.
- Rate Lock. If you are in discussion with a mortgage provider who is offering a favorable rate, be sure to ask for a rate lock. This is usually delivered in the form of a Loan Estimate. This is a document showing the details of the loan, which will include a rate lock section at the top. If rates rise while you are going through the process, you won’t need to worry about losing the attractive rate you’ve found.
- Title Company. The lender’s Loan Estimate will include a list of closing costs that you can shop for, which usually includes title and escrow services. Ask your lender how much time you have to shop for your own provider for these items, and see if you can find a more competitive offer.
Many of the above items may seem insignificant in relation to your estimated monthly mortgage payment, but they can make a big difference in your bottom line. Over a 30-year timeframe, a reduction as little as $20/month is worth thousands of dollars in today’s dollars. My recommendation is to identify the top 2-3 providers, and get this specific information from each of them. This will allow you to compare all of the factors and make an informed decision.