Mortgage lenders have several ways to generate income. Understanding them can save you money when you get a mortgage and even enables you to use that knowledge to your advantage.
1. Interest Interest is the borrower's fee for using the money to cover the cost of your mortgage. This is the largest amount the lender earns from the borrower over the life of the mortgage. For example, if you take out a $600,000 mortgage with a fixed rate for 30 years and an interest rate of 3.0%, you will pay $128,532 over the life of the mortgage as a total interest expense. Therefore, the higher the interest rate, the more money the lender makes. Suppose the rate is 4% instead of 3%, under other identical conditions - and the total interest expense increases to almost twice the amount - $224,974. Keeping in mind that loan interest is the biggest expense for you when taking out a mortgage, you should take all possible steps to lower your mortgage rate, as follows:
- Always compare lenders. The more options you have, the more choices and opportunities you may have to negotiate the best possible terms with one of them.
- If possible, save enough money to make a 20% down payment. Most lenders will offer you a better interest rate if you can pay 20% of the purchase price of the home outright.
- However, choosing for a 15-year mortgage instead of a 30-year mortgage can save you tens of thousands of dollars over the life of the mortgage. But it is important to realize that your monthly payment will be much higher with the shorter-term mortgage.
- Buy discount points if you intend to own the property for a long period of time (more than 5 years), they will allow you to lower your loan rate instantly (see more information below).
2. Lender fees and Closing Costs Lender fees are the costs or expenses lenders will charge you when you apply for a mortgage, they typically charge an origination fee of 0.5% to 1% of the loan value. There may be a flat fee or several separate items of expense, which may include third-party fees for appraisal reports and title services, as well as other expenses. Lender fees can be called different names: origination fees or points, administration fees, or underwriting fees. Lender fees go to pay the loan officer for her to their work, while closing costs have no legitimate purpose and are pure profit. Each lender charges different fees, spelled out upfront in the Good Faith Estimate. Be sure you read it before your mortgage is funded. As with the loan rate, you should get offers from several lenders, compare, and negotiate lower lender fees and/or closing costs. You may come across "no-cost" or "no fee" options when getting mortgage offers, but be careful, such a program usually has a higher interest rate compared with a loan with regular fees.
3. Discount points Discount points are your opportunity to pay in advance for a 1% mortgage rate reduction. For example, if your loan is $600,000, one discount point will cost you $6,000. It can be paid by you out-of-pocket or added to the loan amount. The cost of discount points pays off over time through lower mortgage payments, but it only makes financial sense if you intend to own the financed property for more than five years, which is enough time to recoup the initial cost of paying the points.
4. Loan Servicing This is the fee of the company servicing your mortgage and is usually .250% to .375% of the interest rate or a predetermined fee. Mortgage servicing includes collecting the monthly payment, securing property tax and insurance, and general management of the relationship with you. The best way for you to find the lowest loan servicing fee is to find the mortgage with the lowest rate. Remember, we are here to educate you on the mortgage process and always happy to assist and negotiate the best rate and program available in the market at a given time.
