Tag Archives: Apr

The lowest rate is usually not the best loan!

This might make some of you say “what has he been smoking?” but there is an important reason for this.  I see many people get sucked in to a “my rate is the lowest so I must have gotten the best deal” mentality.

You can’t go online without being bombarded with get a mortgage with a 2.25% rate(APR 2.78%) or other such message.  This is one of the most outrageous offers I have seen.  I can’t think of anyone who would be served by this offer. FYI, it was 3 yr. adjustable rate VA Loan with 1% discount and 1% origination plus all the other third party fees.

I know why online lenders offer it, to make the phones ring.  They later pull a bait and switch and get the borrower into a more realistic loan that their local bank or broker could have gotten them.  For most people, that would have been a 30 yr. fixed rate in the 3’s with either a no points/no origination fee structure.

Lenders offer a wide range of rates and terms for clients so they can select the best mortgage for their situation.  For some, they are never going to move and it might make sense to pay a discount point, origination fees, and closing costs.  On a 30 yr. fixed rate mortgage, it takes about 7 years to recoup the cost of a 1% discount point.  If you are sure you will live there for longer than 7  years, then you would come out ahead.  If you think  you might move in a few years, then don’t pay closing costs or even a 1% origination fee.  The no points/no origination fee option is a much better mortgage for your situation.

There is even an option called the No Cost Refinance that is very popular.  For the record, I call it Lender Paid Closing Cost Refinance as that is more accurate but the slang term is No Cost Refinance.

Here is how it works:  Say a lender offers 3.25% on a VA streamline refinance with no points, just third party  plus your escrow account set up.  That can be about 1.5-2% in most areas.  At 3.75%, that same lender may offer a lender credit of 2% that gets credited to the borrower to offset your closing costs and new escrow account set up.  This means you are not rolling any costs into the loan.  Yes, the rate is higher, but you didn’t pay anything upfront to get it.  The difference in payment might only be 25 dollars more and that would take 10-11 years to recoup if you rolled the closing costs into the new loan.

What I like to do with all my clients is to find out what their reasons are for getting the loan, their goals for the home, and sometimes even their retirement planning goals so that I can help them select the right loan for their situation.  This is why my past clients call me to help them finance their next home or to send a family member to me for help.

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