Are you confident you are choosing the best mortgage offer? When confronted with several offers which ones are more attractive? Which will save you more money in the long run? The first step to securing a low mortgage rate is to shop around to find the best deal.

Deciding on the right offer is not as easy as calculating a monthly payment based on mortgage interest.

You can find plenty of online calculators that will give you a rough estimate of your estimated monthly payments. What you will not find is an in-depth assessment of the fees lenders often impose as well as the details of the common fine print which can catch you off-guard.

Your selection process should involve 2 important steps:

1. Calculating which offer makes the most sense based on rates, fees and points.
2. An investigation and an agreement with all features.

Take a look at two of your offers and write down the specifics of each based on points and bank fees:

Points – Points are equal to 1% of the mortgage loan amount (1 point =1%). Points refer to upfront payments made to your lender. They are commonly used to lower the interest rate on a mortgage loan. By paying more money in points upfront, you can pay a lower monthly payment due to a decreased interest rate. Your lender will give you several different scenarios involving rates and points.

Tip::The longer you plan to keep the mortgage, the more benefits you will gain from paying points.

Bank fees – Ask your lender for a list of all the fees you are required to pay. Aside from your typical closing fees (title, escrow, attorney, etc)) which are independent of the lender, compare your lender’s fees, which include the charges for processing and approving the mortgage.

Tip: Determine the total amount of fees and use this number in your calculations. Some lenders will say they are eliminating one fee only to add another so beware of misleading information.

When comparing two offers, ensure all other information besides the information you are using in your calculation is constant. Choose offers with the same lock-in period (the period of time where the interest rates and points are guaranteed) and loan type (30-year fixed, 15 year fixed, adjustable, option to convert to ARM, etc.)

How to Crunch the Numbers

The data you will need is the interest rate, points and lenders fees.

EXAMPLE:

You are comparing two offers for a loan amount of $250,000 on a 30 year fixed mortgage with a 30 day lock.

• Lender X offers a choice of:

6.475%  - 0 points
6.35%  - 0.5 points
6.225%  - 1 point
$550 in lender fees

• Lender Y offers you a choice of:

6.45%    - 0 points
6.225%  - 0.875 points
6.1%%    - 1.275 points
$775 in lender fees

The quickest method of calculating is to choose an interest rate that matches between the 2 offers.

In the above example, at 6.225%, here is the calculation to determine which lender is giving you the better deal:

Lender X:

$250,000 x 1.0 point (1%) = $2500 + $550 (lender fees) = $3050

Lender Y:

$250,000 x 0.875 points (0.875%) = $2187.50 + $775 (lender fees) =$2962.50

As you can see from the above example, to get an interest rate of 6.225%, Lender Y charges more in fees, yet due to the reduced points, you end up paying less upfront costs Therefore, Lender Y has the better deal as it relates to initial costs.

“I chose Lender Y…now which interest rate and point combination would save me more money in the long term?”

For example, do you choose 6.45% with 0 points or 6.225% with 0.875 points or 6.1% with 1.275 points? The answer to this question would depend on how long you plan to keep the mortgage. The longer you keep the mortgage, the more advantageous it is for you to secure a lower rate and pay some points upfront.

What you Need to Know

When comparing offers, you must research the features of each loan. These will include insurance premiums, qualifying ratios, any prepayment penalties and future conversion options, along with other terms.  These extra features can make a difference in the overall outlook of your mortgage loan. If you are unsure about any of the features of your loan or how to correctly calculate the offers, consult with your lender or mortgage professional.