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Do You Understand Mortgage Rates, Fees, And Points?

Feb 6, 2008
As you shop for your mortgage loan, you will come across many terms that you might now understand. Because a mortgage loan is probably the biggest financial decision you will ever make, it is important to understand those terms before signing papers. We will discuss rates, fees, and points.

Most banks, credit unions, and other financial institutions advertise their mortgage loan interest rates in the form of an APR, which stands for annual percentage rate. This interest rate, according to the law, must include not only the original interest rate but also the fees you will be required to pay.

This keeps financial institutions from advertising a low interest rate and then tacking on a bunch of fees to make up for the low interest rate. There are both fixed rate loans and adjustable interest rate loans. You will need to discuss with your lender which type of interest rate is best for your situation.

Even though banks are required to advertise their rate that includes all of their fees, it is still best to shop around and get a good faith estimate from multiple lenders. The lowest interest rate is not always the best deal.

So, we all know that you have to pay interest when you take out a loan, but what kind of fees will you have to pay? Also known as closing costs, you will have to pay multiple fees for the work the lender does for the loan. You will pay an origination fee and you will probably also pay fees to have the new home assed.

If you decide to pay these fees upfront, you will probably end up with a lower interest rate than advertised. If you can afford to, it is best to pay these fees off instead of adding them to your loan amount, which will end up costing you double due to interest in the long run.

Now if your lender runs on a points system, you will need to know what to expect. If they do, they will probably tell you if you need to pay any points when they give you a good faith estimate. Points are simply money you are required to pay at closing.

One point is equivalent to one percent of the mortgage loan. If you are going to be borrowing $200,00 you would have to pay up $2,000 in order to pay one point. Some lenders require the borrower to points and others don't mess with this system.

If you do pay points ahead of time you will get a discount on your interest rate. The more points you pay ahead of time, the better interest rate. If your bank does not work on a points system, you can always make a down payment to lower the amount of the loan and sometimes you will get a lower interest rate because of a down payment too.

Always remember to talk to multiple financial institutions when shopping for a mortgage loan. This is the best way to compare rates, fees, and points.
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