Trade-off Between the Best Mortgage Rates and Fees
By: Freeman Liz
September 20, 2010
If you compare mortgage interest rates online, in the newspaper, or by making a few phone calls, you'll be quotes a wide range of mortgage interest rates. And you'll find that the lowest rates almost always cost the most money. So should you just always choose the lowest mortgage rate? The lowest cost? Or some combination of the two? How do you know?
The lowest mortgage rates come at a price
It costs mortgage lenders to get money to lend, and the lower the rate, the more it costs. So of course that cost will be passed on to you.���� Mortgage pricing comes in three guises: par, discount, and rebate or premium. You might think that "discount" means that you'd pay less, but in fact "discount" rates are the lowest, so they cost the most. You pay what are called "discount points" to get the lowest mortgage rates. The more discount points you are willing to pay, the lower your mortgage rate.
"Par" pricing is what you get when you pay no discount points. You may pay an origination fee, and there could be other charges for underwriting, appraisals, title insurance, and escrow services. But the money itself comes at no charge. Then, there is "rebate" or "premium" pricing. These loans carry a higher interest rate. Why would you want a loan with a higher rate? You might if the rebate is used to pay your other charges, like the lender fees, appraisal or title charges, or even your property taxes.
The bottom line
In general, the shorter your time frame, the less you should pay for your mortgage. That's because it takes time for the monthly savings generated by a lower mortgage rate to compensate for the higher cost of getting that rate. The longer your time frame, the better your chances of breaking even and then saving money by choosing a lower rate at a higher cost. In general, if you don't know what your time frame is, you should pick a mortgage program with lower upfront costs.
Mortgage calculators can help you determine what the break-even period is when you choose a more expensive loan versus a cheaper one. Then you can decide which option is right for you.
