Neuswanger: Many factors determine the cost of a mortgage loan
When you are taking out a mortgage loan, there are many factors that determine the actual cost of the loan. It’s not just the interest rate and the payment. Loan closing costs can skew the true cost of a loan, sometimes by tens of thousands of dollars over time.
There are loan closing costs, and there are transaction closing costs. Loan closing costs include the origination fee, underwriting fee, tax and flood certificates, appraisal, credit reports and lender’s title insurance and the title company loan closing fee.
Transaction closing costs include setting up escrows for taxes and insurance, owner’s title insurance, transfer taxes, and the title company transaction closing fee. Transactional costs are the same regardless of the terms of the loan.
When you apply for a mortgage you have the option of choosing a loan within a range of interest rates. The highest rate will generally have no origination fee and will pay you a credit toward your loan closing costs. The lowest rate might include paying an origination fee, discount points (a point is 1% of the loan amount) and no closing cost credit.
Pay more now, less later
In other words, you can pay less up front and have a higher monthly payment and interest rate, or you can pay more at closing and have a lower rate and payment.
For example, today on a $500,000 purchase price with $100,000 down you could get a loan for $400,000 at a rate of 3.625% and pay $12,000 (3%) in origination fees and discount points.
If you chose a rate of 4.625%, you eliminate the $12,000 and the lender gives you a credit against your closing costs of $1,344.00. The payment at 3.625% is $1,824.00 vs. $2,056 at the higher rate. For $232 per month, your closing costs decrease by $13,344.00. That’s about a 58-month payback.
There is a second element that homebuyers need to consider as well. While both loans will pay off over 30 years, the lower rate loan actually builds equity quicker in the earlier years.
Over five years, the 3.625% loan would pay down by about $40,400. In the same time span, the 4.625% would only pay down by about $34,682. So in effect, the borrower is saving an additional $5,718 over five years with the lower rate, in addition to $13,920 via lower monthly payments.
Over 30 years the only savings would be the lower payment, but if the borrower might well be out of the property or the loan in a shorter period, there is a significant difference.
There are also some half-way options that might, for example, eliminate part of the points and no lender credit.
Borrowers should ask their lender for an amortization table and factor in not only the closing costs but how quickly the loan will amortize off over the anticipated period they will own the home.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342 He welcomes mortgage related inquiries from readers. His web site is http://www.mtnmortgageguy.com