The two biggest buyers of home loans have just increased their fees on refinanced loans by half a percentage point, thereby reducing the price they will pay lenders for these loans. This will make home loans a bit more expensive for borrowers because lenders will pass these fees on. It made me think that most people don’t know how to compare loans.
If you are considering buying or refinancing a home or other real estate, I encourage you to seek the best deal from local lenders. Local lenders depend on referrals and repeat business and that’s who you want to work for, not some stranger online trying to push as many people as possible through a pipeline with little concern for quality or service. In my experience, these incredible rates advertised online are rarely effective. And once you get deep into the process, additional charges start to pop up. At that point, it’s too late (or too painful) to back down.
When comparing offers from local lenders, it is important to ask the right questions. For an apple-to-apple comparison, you should ask for the best annual percentage rate or APR from a lender, rather than the interest rate, as the term “interest rate” can be used to refer to an introductory rate. or other special rate. APR is a legal term that describes a specific metric; it was developed specifically to allow borrowers to purchase loans using the same terms and including most of the costs associated with the loan.
Choosing the best loan does not necessarily mean choosing the one with the lowest interest rate. There are several considerations at play here, including how long you plan to hold the loan. If you plan to stay in your home for the entire 30-year term of the loan without refinancing, it might be worth paying an up-front charge in the form of “points” to reduce the interest rate on the loan. This is called a buyout.
Let me explain. A one year loan with a 0% to five point interest rate is much more expensive than a one year loan with an interest rate of 3% at no time. On the other hand, a 10 year loan with a 0% to five point interest rate is much cheaper than a 10 year loan with a 3% interest rate at no time. The difference? The duration or longevity of the loan.
Just as you need to determine whether it is worth paying points up front to reduce the interest rate over the life of a loan, lenders need to determine how much they charge for points based on the length of the loan. . Lenders often sell their loans to other lenders, a legitimate practice that affects the pricing of their services. This is why it is so important to shop. You need to find a lender whose pricing structure matches your budget.
A service-oriented lender will walk you through various scenarios: What would the interest rate be if you paid a point? What is the payback period of the loan? How long do you have to hold on to the loan for the buyout to be worth it? By using a measure like the APR, most of the loan costs will be included. A word of caution here: When calculating the APR, use the length of time you plan to hold the loan, not the length of the loan. So, if it is a 30 year fixed rate loan but you plan to sell or refinance after 20 years, the APR should be calculated over 20 years. Your real estate agent can also help you with this.
I highly recommend asking your real estate agent to refer you to a loan officer they trust. When you live in a small town, it quickly becomes apparent that they provide good value for money and good customer service.
It is good to buy some things online. Loans are not one of them.
If you have any questions about property management or real estate, please contact me at [email protected] or call (707) 462-4000. If you have an idea for a future column, please share it with me and if I use it I’ll send you a $ 25 gift certificate to Schat’s Bakery. To view previous articles, visit www.selzerrealty.com and click on “How’s the Market”.
Dick Selzer is a real estate broker who has worked in the field for over 45 years.