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Choosing a Loan
Comparing loans is a question of tradeoffs. You pay more points; you get a lower interest rate. You make a higher down payment; you don't pay for private mortgage insurance (PMI). It takes time to analyze your loan options, but it will pay off. Consider all the tradeoffs below and then see our list of
LoanTypes
to select a loan.
Loan Type/Term
The length of time you plan to keep your home is one of the most important factors in choosing a loan. If you'll keep it more than five years and want the security of a fixed payment, a traditional 30-year,
fixed-rate loan
may be a good option. There are, however, considerations to make when choosing a fixed rate mortgage. Fixed rate mortgages are available in terms of 10, 15, 20, 25, and 30 years. Generally, the shorter the term, the lower the interest rate.
A convertible fixed-rate loan, which allows you to get a lower rate if interest rates decline, may be even better. If you'll keep your home only a short time, consider an
adjustable-rate loan.
An adjustable carries a low interest rate in the early years of the loan, so you'll pay less on the house before you sell.
Interest Rate
Interest, or the cost of borrowing money, varies depending on market conditions, the lender, the loan program, the down payment amount and the quality of your
credit record.It may also depend on how much cash you have available to pay points, or prepaid interest, up front. Again, consider the tradeoffs, and shop for rates with more than raw numbers in mind. The best interest rate for you isn't always the lowest.
Points
Points, also known as discount points, are fees that you pay to a lender. One point equals 1 percent of the loan amount (or $1,000 on a $100,000 loan). Many lenders offer "no-points" loans, but you pay a higher interest rate. Most lenders offer a number of rate/point combinations from which to choose.
The less time you plan to hold the loan, the less you benefit from paying points. For example, a lender may offer a 7.75 percent loan for $100,000 with no points, for a monthly payment of $716.41. The lender may offer the same loan with a rate of 7.25 percent in exchange for two points, for a monthly payment of $682.18, or a rate of 6.75 percent in exchange for four points, for a monthly payment of $648.60. This example shows the longer you hold your loan, the more you benefit by paying points to get a lower rate, because it has more time to create savings.
Lock-In
When you shop for a loan, the rates and points quoted to you can change at any time. Locking in a loan rate is the only way to get the lender's commitment to that rate.
Most lenders will lock in for 15 to 30 days once you have submitted an application, which means they allow you 15 to 30 days to get approved for a loan at that rate. You'll pay anywhere from a quarter of a point to a full point to lock in a rate for 15 to 30 days. Locks over 30 days cost an additional one-eighth point for each increment of 15 to 30 days. Except for very long locks (more than 90 days), lenders add the cost to points paid at closing rather than collecting it up front.
Loan-processing problems or other delays can wreak havoc with lock-in periods. Most lenders will suggest an optimal lock-in period. If interest rates are steady, you may not need to bear the extra cost, but if
interest rates are fluctuating, locking in will guarantee peace of mind--as long as your loan closes within the specified period.
Fees/Closing Costs
Fees can vary widely by lender, so make sure you always get a
written list when you talk to a lender. The total amount, including points (usually 2 to 3 percent of your loan amount), can influence your loan decision--especially if you are short on cash.
Some lenders will pay "rebates" or negative points to defray settlement costs, but consider this option carefully.
For example, to pay $3,000 in settlement costs on a $100,000 loan, you would take a negative three-point loan. However, one negative point may push up your interest rate by as much as 0.5 percent, in which case three points would raise it 1.5 percent.
The relationship between rate and points varies, so it pays to study the
amortization schedule carefully. In general, negative points are most appropriate if you don't plan to hold your loan a long time, so you only pay a higher interest rate for a short time.
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Confused?
Don’t worry- our Loan Processors at Clear Progress are here to help you. If your Loan Processor has not already set up an appointment to talk with you, please call them to discuss your options and help you make the best decision.
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