To accurately compare the cost of one loan to another, you need to understand the relationship between the different components of a mortgage rate. In this article, I'll explain the different components of a mortgage rate, starting with discount points and interest rates. Lenders prepare interest rate tables that they are willing to accept on certain loans. These interest rates are called “par rates”, which is the interest rate at which the lender will offer the loan without requiring the borrower to pay discount points.
Borrowers can choose to purchase discount points to “buy down the nominal rate”, meaning they can pay more upfront in exchange for a lower interest rate. Sometimes lenders add discount points without you asking them to make your rates appear lower. To avoid confusion, you can request a loan offer without discount points or use the mortgage's annual percentage rate (APR) to make a fairer comparison between a loan with discount points and one without. Different combinations of discount points can be advantageous depending on your financial situation and the lender's offer.
For example, if you have extra money and plan to stay at home for a long time, paying more discount points can save you money. But keep in mind that there is no standard amount by which a discount point reduces your rate and it may vary between lenders, depending on loan type and mortgage market. The calculator results will tell you your breakeven period, which is how long it will take you to start saving money at the lowest interest rate. If you think you're going to refinance or sell your home before this breakeven period ends, it's best to avoid discount points. Discount points aren't the same as the “Other Costs” or “Loan Costs” you'll see on page 2 of your loan estimate.
With a few exceptions, “Other costs such as taxes, homeowners insurance, registration fees, and mortgage insurance are usually standard and if you pay more or less, “Other costs” doesn't affect your interest rate. The APR shows you the total cost of your mortgage but it doesn't tell you how much cash you'll need to close a particular loan or how much you need to budget for monthly payments. To get a true comparison of your mortgage options, make sure you understand how discount points, interest rates, and loan costs play into the equation. When determining how much housing you can afford, it's important to consider each component of PITI (Principal + Interest + Taxes + Insurance). Your mortgage payment is made up of several components including returning your loan money to the bank, interest on your mortgage, and your escrow. When you understand the components of your mortgage, how they change over time, and how they can affect capital, you're in a better position to manage it. The mortgage repayment program provides a detailed view of what part of each mortgage payment is dedicated to each component of PITI. When determining how much housing you can afford, it's important to consider each component of PITI (Principal + Interest + Taxes + Insurance).
The mortgage repayment program provides a detailed view of what part of each mortgage payment is dedicated to each component of PITI. Finally, guarantee is another component that takes into account the amount of money you are willing to deposit in your new home. This component will also affect your monthly payment costs.
