Interest Rates are only half of the equation when evaluating the overall financing package being provided. Think of it as a scale. On one side is the interest rate, on the other are the closing costs. When both sides are level, this means the closing costs and interest rates are even. In the mortgage industry, this means you are receiving the lowest rates available at that time without "buying down" the rate. This closing cost schedule will include an industry standard 1% Origination Fee, Lender and Title Fees. The 1% Origination Fee represents 1% of the loan amount. This is often called a 0+1 rate quote meaning 0% in Discount Points and 1% in Origination Fee.
If you tip the scales in the way of the interest rate, meaning the interest rate is slightly lower, then the closing cost side is also impacted meaning they will be higher. For instance, if you stake a slightly lower rate, you will have to pay Discount Points in addition to the standard Origination Fee. Each Discount Point represents 1% of the Loan Amount. Typically, you can expect to pay 1% (or 1 point) to buy down the interest rate by .25%. Keep in mind, you can only buy down an interest rate so far. Banks and investors will only offer so low of an interest rate.
On the other hand, if you want to tip the scales in favor of lower closing costs, then the interest rate is affected and will be slightly higher. The investors who purchase the mortgage loans will pay the Originator for a loan with a higher rate because it represents a higher rate of return for them. The Originator can then use this money to waive closing costs on your behalf. The costs that can be waived can be just the 1% Origination Fee, or include any or all of the other closing costs existing on the loan. These rate quotes are often referred to as No or Low Cost Loans and are offered on purchases as well as refinances.
Keep in mind, just because someone is willing to offer you a lower rate, make sure you are not paying higher closing costs for it. If you are, make sure to analyze the difference for your particular situation. We do this analysis for you and give you different options based on your specific situation with the pros and cons of each so you can make the best decision for you and your family.
