How to compare rates. As a borrower shopping for a rate, and you should, it is important that you know what you are looking at. It can be hard to figure out how much the rate is costing if you do not have the figures in front of you. The loan officer you are working with has the ability to provide you with an estimate of costs and when disclosed properly this will allow you to see how much the rate is costing you. It might be in the form of a Good Faith Estimate or a Closing Cost Worksheet. There are 4 main parts to this form.
Items payable in connection with the loan or the lender charges. Typically this is the only part the loan officer can control directly. These are the fees you should compare directly. What you should look for is an origination fee, a loan discount and/or a broker fee. These are fees that are directly related to the rate and/or loan officer compensation. It is not that they are good or bad it is that they are a cost to you the borrower. Normally the presence of this fee should allow for a lower rate although that is not always the case. It is best to total up all of the fees and compare them, proposal to proposal. Ask questions about the fees. What they are for, etc. Standard fees you might see are the credit report fee, appraisal fee, tax service fee, and flood certification fee.
Items required by the lender to be paid in advance. These are the days of interest and the Homeowners Insurance required at the closing of the loan. Interest is paid in arrears on a mortgage loan. When you make your mortgage payment at the first of the month interest is paid on the balance of the loan back to the beginning of the month prior. Then the rest goes against the principal. So at the closing of the new loan the lender will prepay interest forward to the end of the month and your first payment will not be due until the first day of the following month. The later in the month you close the loan the less interest you pay on the money you are borrowing.
Reserves deposited with the lender. These are the escrows. This is the money collected at closing to seed the escrow account if you are including the taxes and insurance with your payment. In some cases you can choose to pay the taxes and insurance yourself. This will lower the transaction costs but you will be responsible for paying the taxes and insurance as the come due.
Title Charges. This protects the lender and the buyer against defects of title. This also includes the fees for the attorney to prepare the loan documents and close the loan. The Title Company will also disburse the proceeds of the loan when if funds.
This is the information you should receive in order to evaluate the cost of the loan to you the borrower. Sometimes a lower rate comes at a higher cost. All things being equal if the loan is disclosed correctly the title charges, escrows and items paid in advance should be about the same. It is the Lender Charges that you will have to compare. And if you are happy with the fees and the rate is inline with the market you will know you are getting the loan you want.
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