It’s official.
You did it!
You spent weeks searching the internet looking for the perfect home at your new PCS location and finally, after all that scrolling, you finally found it. It’s THE ONE.
You call your real estate agent and calmly tell her that you’d like to offer, and she calmly says, “okay” and then…”did you get your pre-approval yet?”
Duh duh duh…oh yes, that nagging detail. It’s time to figure out your home loan.
You quickly scroll through several lender websites promising to get you the “lowest rate you’ve ever seen!
“We can get you a whole percent lower than your neighborhood lender!”
But does that low interest rate seem a little too good to be true? What about all of the lender fees that go into that? How do you “shop rates” if you can’t understand the details enough to compare apples to apples?
Let’s dive in.
The very first thing to remember when considering where to get your mortgage, is that your loan is being SOLD to you.
That means every loan company is going to try to package and market their loan offering to look like the best deal out there. It’s your job to figure out what is actually the best deal for your specific situation.
(As a quick note, that doesn’t always mean the lowest price. If you need a lender who can close quickly, you might prioritize that over price. If you value clear communication and a trustworthy loan originator, then that might take priority.)
For our purposes in this article, we’re going to show you how to compare the financial aspects of a loan product.
The three main ways that lenders charge for a home loan are: interest rate, closing costs, and points. Let’s start with the most talked about…interest rate.
Interest Rates
The interest rate on your VA home loan is the amount your lender charges you to give you the loan.
It is a percentage of the principal and is typically noted on an yearly basis known as the annual percentage rate (APR).
Lenders can charge higher or lower depending on the product they’re giving you. Rates change daily and typically reflect what is happening in the market.
Sometimes loan originators can offer you a “deal” by giving you a higher rate, but charging you less on other fees like no closing costs or points. (Keep reading for more on those topics!)
It’s important to know how all of the different costs shake out and how they affect your monthly mortgage payment.
Closing Costs
Every single VA home loan has closing costs. Closing costs can cover the home inspection appraisal and title fees, but also loan fees such as filing, underwriting, processing, origination, etc.
It costs your lender money to be able to provide you a loan, and they are paid back through the loan fees.
Underwriting, one of the fees, can include the process of verifying that you qualify for the loan.
The origination fee is just what it sounds like. It is the fee the lender charges for issuing the loan and is typically between 0.5-1.0% of the total loan amount.
In addition to lender fees there are Title fees, prorated taxes, prorated insurance and potentially additional local tax or transfer fees that all roll into closing costs.
Overall, you should expect your total closing costs to be between 2-4% of your home loan. The most cost-effective way to pay your closing costs is up front in cash and not tie them into your home loan. This saves you from paying extra interest over time! Another option is to request the seller to assist you with covering the closing costs. Typically, if there is little competition for the home (meaning few buyers) the more likely a seller is willing to help.
Lender Points
Lender points allow you to pay more money upfront in exchange for a lower mortgage interest rate. The actual rate decrease varies by lender and typically by the day.
A lower interest rate means you’d pay more in closing costs, but you’d have a lower monthly payment for the entirety of your VA home loan.
Each point costs 1% of your total loan amount.
Imagine this, you’re taking out a $375,000 home loan as a military homebuyer. Below is what your rate could look like with and without mortgage points:
Mortgage Points | Upfront Costs to Buy Points | Interest Rate | Total Interest Paid over 30 Years |
0 | $0 | 5.5% | $391.515.15 |
0.5 | $1,875 | 5.25% | $370,475.00 |
1 | $3,750 | 5.0% | $349,709.19 |
2 | $7,500 | 4.5% | $309,025.17 |
By paying one point, or $3,750 up front, you could save more than $20,000 over the life of the loan.
How long would it take you to recoup the point? Generally 4-5 years but you have to work the math. One basic way of doing so is looking at the Payback Period for the points. Simply take the cost of the points and divide them by the monthly savings you would get. This gives you your payback period in months. If you plan on selling or refinancing Before the calculated payback period then points may not be the best option. If you plan on doing so After, then points may be worthwhile depending on how big a benefit they provide.
Let’s go through some examples of VA loan offerings and see which product is actually the best financial deal. The below example is based on a $375,000 loan balance with an exemption from the VA funding fee.
Term | With Mortgage Point | Balanced | Lender Fees Rolled In |
Interest Rate | 5.625% | 6.000% | 6.250% |
APR | 5.754% | 6.038% | 6.253% |
Mortgage Points | 1 Point ($3,750) | 0 Points | 0 Points |
Lender Fees | $1,395 | $1,395 | $0 |
Total Lender/Point Costs | $5,145 | $1,395 | $0 |
Monthly Principal & Interest Payment | $2,158.71 | $2,248.31 | $2,308.94 |
Points Payback Period (Cost of Points/Monthly Savings) | 42 Months ($3,750/$89.60) | 0 Months (no points) | 0 Months (no points)
|
Lender Fee Payback | $0 | $0 | 23 Months |
One thing of note: Notice how the APR is significantly lower when you add points? The examples above help show that the monthly payment versus total lender costs (points and fees) don’t always match up. While the APR is lower, the amount you owe at closing may not offset the lower APR benefits.
When choosing a lender, you can’t forget to look at all of the closing costs and lender fees, and not just the APR they’re willing to offer you!
Have more questions about lender fees? Give us a call at 316-669-5272. If you’re ready to get started on the pre-approval process for a loan, give us a call or fill out a form here: www.wevetthomeloans.com/getstarted
