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Making An Accurate Mortgage Refinance Rates Comparison
By EchoBay Loans Staff Writer

When it's time for a mortgage refinance, rate comparisons can be one of the biggest headaches associated with it. Just because two lender's rates are the same doesn't mean you can get an equal deal from either one. Fees associated with a mortgage refinance vary widely from lender to lender. With fees easily running into the thousands of dollars, it can make a great rate look really bad in the long run.

Lenders are now required by law to include the APR (annual percentage rate) when quoting rates, but not all lenders include the same fees in the calculation. It's important during a rates comparison to look at the interest rate, APR and all associated fees.

Fees included with a mortgage refinance can include:

• Appraisals
• Attorney fees• Credit report
• Underwriting
• Rate lock
• Documentation fees
• Filing fees
• Surveys
• Origination (stated as a % of the loan)
• Discount points (stated as a % of the loan)

Because lenders refer to fees differently, it is important to compare the entire fee amount rather than comparing individual fees. It is also important to remember to compare using the same loan amount and terms. Trying to do rates comparison for a 15-year and a 30-year loan will not work. You should be comparing apples to apples in terms of length of the loan and the type of rate (adjustable or fixed).

Rates comparison when the interest rates are the same
Let's look at an example to see how to compare two loans accurately:

  Loan A Loan B
Loan amount $100,000 $100,000
Term 30 Years 30 Years
Rate 6.5% 6.5%
Origination fee 1.0% 1.5%
Discount points 1.0% 0%
Other fees $1,500 $2,500
TOTAL fees $3,500 $4,000
APR 6.846% 6.897%

You can see in this example that Loan A carries a lower APR even though the interest rate is the same. Based on this mortgage refinance scenario, Loan A is a better deal.

Rates comparison when the interest rates are different
Rates comparison can be trickier when lenders are offering different mortgage rates:

  Loan A Loan B
Loan amount $100,000 $100,000
Term 30 Years 30 Years
Rate 6.0% 6.5%
Origination fee 3.0% 1.5%
Discount points 1.25% 0%
Other fees $2,000 $2,500
TOTAL fees $6,250 $4,000
APR 6.613% 6.897%

At first glance, Loan A appears to be the better deal because the APR is lower. However, the APR assumes that you will stay in the house throughout the term of the mortgage loan. If you only plan to be in the house for a short time period, it pays to do another calculation - the breakeven point.

Calculating the breakeven point
Total fees for Loan A are $6,250 where Loan B is $4,000 for a difference of $2,250. Because the interest rate is lower on Loan A, the payment is as well at $599.55 per month compared to $632.07 per month for Loan B for a difference of $32.52 per month. To calculate the breakeven, divide the difference in closing costs by the difference in the monthly payment: $2,250 / $32.52 = 70. This is the number of months it will take you to recoup the difference in closing costs.

If you plan to be in your house for more than 70 months, Loan A is the best choice as the APR indicates. However, if you plan to stay in your house for less than 70 months, Loan B would be the better choice. Even though the interest rate is a little higher, the lower closing costs result in less expense for you in the first 70 months.

Keep it simple
Rates comparison among lenders during a mortgage refinance can be confusing. But there is a simplified calculation if you know how long you plan to be in your house. Simply multiply the payment by the number of months you plan to occupy your home and then add all closing costs and fees. The loan with the lowest figure is the best deal for you.

Next Step:
Avg. National Rates
30 Yr Fixed
15 Yr Fixed
1 Yr ARM
WSJ Prime
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