How do lenders charge borrowers, really?

There’s three basic ways that lenders charge borrowers.

 That is through the interest rate, through lender paid closing costs, and through finance points.

And we’re going to touch on all three of those.

The reason I’m bringing this up is a lot of folks will come to me and say:  

“Hey, Evan, how do I get the best rate?”

“What rate can you offer me?”

“Hey Evan, can you offer no closing costs?”

“What are the best closing costs that can be offered?”

“Or if I’m trying to buy down my rate, what’s the best cost you can give me for that?”

A lot of folks get so caught up on interest rate or other folks will get so caught up on their closing costs that they forget that they really get charged three different ways by a lender, typically.

And that’s through that interest rate.

That’s through the lender paid closing costs.

And those finance points.

So, know this – I like to give an example of like a three-way teeter totter.

If you’re going to adjust one of those three, typically the other two are going to adjust slightly as well.

So, if you want to have a lower rate, oftentimes you’ll see those closing costs or you’ll see those finance points go up one way or the other.

If you want two to go down, one could go way up.  So, it’s important to understand and look at all three ways that you get charged as a borrower.

So, let’s look first at the interest rate. Interest rate is very simple.

 That’s a, hey, I’m getting offered 5%, 6%, 7% – whatever it is on my loan – and that’s how I’m paying interest back to the lender for giving me the money.

 It’s the most common one that people think about when they think about taking out a loan on a home. What is my interest rate?

And I’d say closely behind that though, are lender paid closing costs.

So, this is where you might hear a lender say, hey, we have an underwriting fee or an origination fee, a processing fee – all different types of fees associated with doing the loans.

Now you might hear from some lenders “those are junk fees” and not real, and so they don’t have them.

Well, you got to think of it this way. How does a lender get paid?

They’re getting paid somewhere. And it’s through those three ways of charging you.

I will say some of those fees are very legitimate. It does cost to underwrite a loan, to process a loan.

It’s just, hey, are they pointing that out on the lender fees? Are they building that into the interest rate or through the finance points in some way?

Because then lastly, that third thing are finance points.

This is where you pay money upfront to bring down your interest rate.

Now, we have another really good video that helps explain how to evaluate finance points and if they’re worth it or not, but just think of it this way – financing points are where you pay money upfront to get a lower interest rate at the beginning.

And especially over the past couple of years, interest rates have risen. When we’re in a high rate environment, a lot of lenders will try to put points into a loan to help  show you a lower interest rate.

 Does that make the deal better?

Possibly, but not necessarily, because sometimes those financing points might not be worth it at all.

If you have to pay, say, one point, which equals 1 percent of a loan value – so you essentially pay 1 percent of your loan to get a fractionally smaller interest rate – if the payback period on that, meaning your savings divided into that cost, is 5, 6, 7 years, it might not be worth it at all to deal with financing points.

So, it’s important to understand that it’s one way you’re getting charged.

So, now the deal is that three-way teeter totter – you want to look at all three of those costs and how they balance with each other. Because again, if you lower one, oftentimes you’re raising one or both of the others and vice versa.

And that’s where, if you just think about it, know that when you’re looking at a lender and comparing it to others, you want to look at all three of those categories.

You want to look at the interest rate, of course, but you also want to take into consideration the lender paid closing costs and any finance points – and know that most lenders can adjust those a bit, depending on your situation.

And you want to know the real truth.

A lot of folks are listening to you and hearing,  hey, what did they say? Did they say they  want lower interest rate or did they say they want low closing costs? Because then they’re going to adjust their fees and costs based on that. So important to compare all three of those.

 My name’s Evan Kaufman, your VA loan originator.  More than happy if you ever have questions on that or want to compare anything, please let me know and I am happy to go over that with you. Take care.