Mortgage interest rates are very typically confusing to most borrowers. They see a rate advertised and think that’s a deal. They rarely are made aware of what may be required to secure that rate.
The first rule is one of the oldest and most common rules in consumer history; if it looks too good to be true it usually is. Unfortunately, the mortgage industry still has many that advertise false and misleading rates in order to tease the potential borrower into engagement. Some will actually take the borrower into a full loan process only to pull the rug out from under them during the process. When this occurs it’s usually too late in the process to switch lenders without the potential defaulting of underlying purchase closing. Fortunately, most of the mortgage lenders operate in an honorable and professional fashion but consumer beware.
In almost every mortgage loan estimate I have examined the borrower is typically paying some sort of upfront lender fees. These fees are required to be disclosed on page 2 of the Loan Estimate (“LE”) box A “Origination Charges”. These fees will most typically be referred to as “processing fee”, “application fee”, “underwriting fee”. Most typically these fees will average $900 +/-. This fee is really nothing more than prepaid interest disguised with these other names. Unfortunately, unless these fees are titled “origination fee” and/or “discount fee” they’re typically not tax deductible.
These fees are used for nothing more than to lower the advertised interest rate. It’s simple, remove these charges and the interest rate is increased. The typical recovery period for these fees to be realized in monthly payment savings is usually 5 years +/- a few months depending on the amount of the mortgage loan itself. Example: paying an at closing $900 underwriting fee provides a slightly lower interest rate but only results in a minimal monthly savings of about $12 in the payment. It will typically take about 75 months +/- before the borrower has reclaimed that $900 upfront fee before they start realizing any monthly payment savings moving forward.
One must ask themselves this question: do I want that $900 +/- in my pocket today or do I want to save myself $12 per month +/-. If the answer is to keep the $900 in your pocket today then make certain there are not any fees in box A of the LE. Ask the originator to provide you with a side by side comparison. If they refuse and/or delay find yourself another lender.
Don’t ever focus on the interest rate by itself. We don’t pay interest rates – we pay with dollars and cents. What’s the resulting difference in payment and how long will it take me to recover those upfront fees? I will guarantee you that it will be several years.
As a matter of practice our originators always quote rates absent any such lender related fees. This may result at first in the appearance of a slightly higher interest rate as described above. However, we always will offer the borrower the opportunity to consider paying these upfront fees but we title them what they really are, “discount points”. This allows the borrower to deduct them from their income tax if they’re itemizing their deductions. It makes no difference to us if the borrower elects these fees as they do not result in any added compensation to the originator or the company itself. It does make a difference to us that the borrower makes an informed intelligent decision rather than being effectively tricked into what they think is a better deal when it really may not be.
Use this mortgage calculator to do the math or better yet give us a call using our Fort Lauderdale or Orlando contacts.