Low Rate, But High Costs? What To Know.

When shopping for a mortgage, borrowers are often faced with the decision of whether to take a lower interest rate with higher costs, or a higher interest rate with lower costs. This decision can be confusing, and it's important to understand the factors that go into it.

One way to think about this decision is in terms of points. Points are a type of fee that borrowers can pay in order to lower their interest rate. Each point is equal to 1% of the loan amount, and paying one point can lower your interest rate by 0.25%. For example, if you are taking out a $200,000 loan, one point would cost $2,000.

When a lender offers a lower interest rate, they may also charge more points. Conversely, when a lender offers a higher interest rate, they may charge fewer points or even offer lender credit. This is where the trade-off comes in. Borrowers must weigh the costs of paying more in points against the savings they will receive from a lower interest rate over the life of the loan.

It's important to note that big banks often offer very low rates, but these rates come with high costs that are not always worth it. Banks often charge more points and additional fees which can add up to thousands of dollars.

Another consideration is that the big banks will usually sell the loan to other investors and won't retain the loan themselves, which means that the customer service and the process might not be as personal and efficient as with a smaller lender.

A good rule of thumb is to compare the costs and interest rate of the loan to determine whether the lower rate is worth the higher costs. It's also important to compare rates from multiple lenders, as smaller lenders may offer more competitive rates and costs.

It's important to remember that the interest rate is just one factor to consider when shopping for a mortgage. It's also important to consider the overall costs, the lender's reputation, and the customer service.

In conclusion, when shopping for a mortgage, borrowers are often faced with the decision of whether to take a lower interest rate with higher costs, or a higher interest rate with lower costs. This decision can be confusing, but borrowers should weigh the costs of paying more in points against the savings they will receive from a lower interest rate over the life of the loan, and it's important to compare rates from multiple lenders, as smaller lenders may offer more competitive rates and costs. It's also important to remember that the interest rate is just one factor to consider when shopping for a mortgage.