Home buying loans come with multiple fees built into them, and being able to accurately compare different loans requires knowing what the various fees are. Here's a breakdown of the major fees you should be familiar with in a home buying loan.
The interest rate of a home buying loan represents the cost of borrowing the money that the loan provides. The interest is charged as a percentage of the remaining principal, and a loan's interest rate may be fixed (doesn't change) or variable (adjusts over time according to an index).
The interest rate of your particular loan will be based on the lender's prime rate. The prime rate is the best interest rate that the most creditworthy borrowers receive, and other borrowers receive somewhat higher rates depending on their credit history and other credentials.
The higher an interest rate is, the more interest you'll have to pay each month. Thus, you want as low an interest rate as possible.
Discount points are an optional fee that's paid up-front. Paying for the points is commonly referred to as buying them, and each point you buy nets you a deduction on the interest rate. Essentially, discount points let you pay more up-front in order to save on interest over the life span of the home buying loan.
You should buy points if you can afford the one-time payment and will live in the house for a while, as you'll recoup the money spent on points over time. If you expect to move soon, you may want to forgo buying points because you won't recoup the full amount paid before you sell the house.
The origination charge is a fee that the underwriting financial institution assesses. The fee covers expenses related to checking credit reports, verifying financial details, and creating the home buying loan.
The origination charge is usually a set fee that you have little control over.
A rate-lock fee is another optional expense. Should you decide to pay the fee, you'll be guaranteed a certain interest rate for a specified amount of time. If interest rates fall during the time frame, you can still qualify for a lower rate. If interest rates rise, you'll still get the guaranteed rate.
If you're concerned about interest rate volatility, you should consider paying the rate-lock fee. If you can financially handle a slight variance in interest rates, you might want to forgo this cost.
For more information, reach out to a company like Lund Mortgage Team.