Foundry How To: Cost-Benefit Analysis
It's easy to confuse getting the best deal with choosing the one that's right for you. There's a saying "Interest rates don't change, but the cost of interest rates is always changing." In mortgage terms, you can pay discount points to get a lower rate, or receive a lender credit on a higher one. Sometimes you will land right in the middle - which is referred to as "par" - no points, no lender credit.
One discount point (1% of loan amount) usually reduces the interest rate on the loan by 1/4%. Paying $1,000 to save $250 per year in interest is a good deal if you plan to be in the mortgage for a long period of time. (This example is a 4-year break-even). The reverse is true for lender credit. Taking 1/4% higher rate to receive $1,000 bonus at closing is good if you plan to be in the mortgage for a short period of time.
Make the determination whether you should focus more on rate or closing costs before shopping lenders for the best deal. Trying to manage so many scenarios can be difficult as the cost of each rate is changing every day. Be sure to consider how long you will be in the home AND how likely it is that rates will drop enough to present a refinance opportunity.
Lenders only control a small portion of the total closing costs involved in a real estate transaction. Attorney fees, title charges, state taxes, filing fees, interim interest, property taxes, homeowner's insurance, and other charges will be the same regardless of which lender you use. For information on how to determine the "net lender charge" on a Fees Worksheet or Loan Estimate click here.