My husband and I bought our first home in 2022, the summer seller’s market. Navigation went smoothly until that was no longer the case.
We rely on the recommendations of our circle of family and friends for our lender and real estate agent. We’ve asked dozens of questions: What is the procedure for buying a home?How much do we get approved? How much is the monthly loan payment?
And finally: how much cash will we need for the final costs?
Based on the value of the home and our 30-year fixed-rate mortgage loan, we budget about $18,000 for final costs. Homebuyers estimate between 1% and 6% of the total loan amount to cover final costs, all fees. You pay the lender of the loan, adding name insurance, taxes, appraisal fees, and more. Unfortunately, we still wouldn’t be sure of the end result. Numbers up to a few days before the documents are signed.
Less than a week before the big day, our documents indicated that we needed to raise about $25,000 for closing, at most of our down payment. That’s when we found out we owed $13,920 in discount points, which were built into the total. loan fee. We were stunned.
Along the way, our lender had discussed the reduction points. But we didn’t realize that the “drawdown” meant we were buying a lower interest rate and had to pay more cash at closing. It was a lesson in why you deserve to read the fine print.
If you’ve never heard of paying off loan points, here’s how it works. Typically, buy a point reduction for 1% of the total loan charge, and in return, get interest rate relief, usually about a quarter of a percentage point.
In the case of loans, you pay the interest upfront and get a lower interest rate in return. A lower interest rate means a reduction in the monthly payment, saving you cash in the long run. -carry. In our case, we paid 3. 5 percent reduction issuances to reduce our interest rate by approximately 0. 875 percent.
Regardless of the state of the real estate market, you can lower your interest rate in exchange for a fee. But as loan rates began to soar in 2022, buy-back issues (which necessarily lower your rate) have become more attractive.
According to Jennifer Beeston, senior vice president at Garanti Rate, lenders piled up problems at closing. Beeson told me that because interest rates had risen so much, lenders were looking to maintain appropriate rates for borrowers. But they weren’t discussing the next step: Does it make mathematical sense to pay more upfront?
For us, paying almost $14,000 more on the last day to get an interest rate reduction didn’t make sense.
Read more: Mortgage Points and Lender Credits: What You Need to Know
When we were in a position to buy a home in 2022, loan rates had risen aggressively over the summer. To “float” our rate (i. e. , let it fluctuate) and threaten an even higher rate, we lock our borrowing rate for 30 days. to 5. 99%.
The choice between blocking or floating was obvious. When homebuyers “float,” they wait for interest rates to improve, i. e. , to go down. In our case, it was evident that the loan market was not moving in that direction and that we could end up with a higher rate. It was best to book the rate we had received from our lfinisher.
Our offer will be accepted. We budgeted our long-term monthly loan expenses to make sure we were comfortable with the expense.
When we took a look at the fixed rate disclosure, most of the figures seemed correct, with the exception of the final prices – this figure is much higher than expected. But since the final prices weren’t final, we figured the amount would be decreasing and I didn’t give it much of an idea.
Unfortunately, we forgot how many “problems” had been included in our final amount. The overall result was correct. Discount issues are included in the final costs.
When interviewed for this article in 2022, Beeston reviewed our loan documents and noted that the fixed-rate disclosure we signed indicated a “borrower-paid” rate of $13,920.
“For a lender, it’s very transparent,” Beeston said. To a consumer, most people have no idea. Do you think you have reduction problems or do you get a reduction?»
According to Beeston, it’s easy to overlook information about lender-to-lender rate-setting and drawdown issues. Some lenders point out that the problems are fees for which you are responsible, while others bury the charge deep in the document.
She’s right. Our loan originator never explained that we would pay for problems when he talked about giving us s.
“What consumers want to know is that if you say ‘reduction,’ you’re talking about maximum reduction points, which is a huge burden on you,” Beeston said.
In the end, we paid two abatement issues to bring our rate to 6. 5% and have a more comfortable monthly payment. If loan rates drop, we can get a new home loan at a lower rate through refinancing. But we can when the time comes.
Read more: 18 Tips for First-Time Homebuyers
While experts still propose it, we don’t compare lenders after we get our first loan estimate. We thought we’d get the most productive rate possible.
Except we didn’t get the lowest rate given our monetary situation. “If you manage to find the same rate or a higher rate without any points, it means that at the end of the day, you’re not getting the most productive deal possible. ” said Shant Banonsian, senior director of finishes at Garanti Rate.
To avoid a nightmare like mine when buying a home, here are some questions I asked (and have asked) my lender:
My husband and I signed a lot of documents on our 30-day contract. And, to be honest, we didn’t ask enough questions. We felt like we had done our homework and were firmly in control of the process. We find out what it takes to get approved, our type of loan, and even what a fixed rate was. But we didn’t read the fine print.
“Always check each and every document,” Beeston told me.
If you’re not sure why a payment was added or what the information says, ask your lender, even if that means going line by line. It’s the biggest acquisition of your life, so don’t jump in blindly.
Given how quickly the real estate market and loan rates are changing, be sure to talk to experts and learn how to deal with surprises on the last day or later.
“Learn about the procedure so you don’t have to rely 100 percent on purchases in the dark,” Beeston said. “It’s too big a purchase. “
Read more: Thirteen mistakes to avoid when buying a home
Before your first home offer is accepted or after you get your first loan estimate, shop around and compare lenders to get the most productive loan and interest rate right off the bat. Get your loan offers from the standardized loan estimate bureaucracy so you can compare the same documents.
When buying a home, have several features in terms of loan types, terms, and rates. Make sure your lender introduces you to all the features and explains all the costs.
Keep in mind that other points may require lenders to charge points, such as down payment, asset type, or credit score. And sometimes, lowering the interest rate is the way to qualify for the loan.
As with everything, upfront costs rather than long-term savings. Paying off loan problems in exchange for a lower interest rate can be interesting if you’re making plans to own your home for an extended period of time and don’t plan to move. or refinance in the short term. Purchasing one or two abatement issues will allow you to get a cheaper monthly payment, which can save you money over the life of the loan.
But if problems are added, we want to communicate them.
An edition of this story was originally published on private finance site NextAdvisor on October 10, 2022. NextAdvisor was owned by Red Ventures, CNET’s parent company. The story has been updated and edited for publication.
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