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Comparing Loans
Choosing a loan involves much more than interest rates. There are terms,
points, fees, and other factors to consider.
So how can you make sure you're comparing apples to apples when you want to
compare 2 or more loans? Here are some tips.
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| 1. |
The first thing you really have to decide is what kind of loan is going to work
best for you. Fixed rate or adjustable rate? Conventional? FHA? Fannie
Mae? Veterans? These decisions depend on your situation and goals (like how
long you plan to own the home). If you're not sure what kind of loan you're
shopping for, see Refinancing Loan Options. Or
talk to one of our home loan experts by calling the toll-free number at the top
of your screen or contacting your local
office. They can help you decide what would be the best type of loan
for you.
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| 2. |
When you have decided on the kind of loan you want, then you can begin making
true comparisons. In comparing 2 or more similar loans (30 year fixed rate
loans, for instance), with the same term, start with the annual percentage rate
(APR). A loan with an 8.291% APR is less costly than a similar loan
with an APR of 8.460% over the life of the loan. Another way to look at
it is if the interest rate and APR of a loan are drastically different, the
loan has significant closing costs; the closer the interest rate and the APR,
the lower the closing costs. Ask your lender to confirm that all costs are
included in the APR calculation so you can compare apples to apples and not
have any unexpected surprises at closing.
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| 3. |
The next thing to look at is how much you're paying for each loan up front.
This can matter quite a bit if you're either planning to sell the house in less
than four years or you're trying to keep down your closing costs. For example,
consider these 2 loans for $100,000:
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 | | | | | | | | | A. 30-Year Fixed Rate for $100,000 |
| | | B. 30-Year Fixed Rate for $100,000 |
| | | | | | | | | | | | | | | | Discount Points
(dollar value) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Principal Reduction Savings of Loan B over Loan A After 2 Years |
| | | | | $80 greater principal reduction |
| | | | | | | Payment Savings of Loan B over Loan A After 2 years |
| | | | | | | | | | | Total Savings of Loan B over Loan A After 2 Years |
| | | | | $501.68 (principal reduction + payment savings) |
| | | | | | Out-of-Pocket
Savings at Closing |
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NOTE: Sample loans are for illustration only and are not a rate quote, pre-approval or commitment to lend.
In this example, Loan B is the better value over the life of the loan (as shown
by a better APR). Loan A is the better value if you know you'll sell the house
in just a couple of years since you haven't recouped the extra $1,000 for
discount points paid out of pocket at closing.
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| 4. |
Find out when the lender will lock/secure your rate. Often, the rate
quote is a short term lock (10-day) that cannot be secured until you are
approved. At Bank of America, we secure the rate at application with a 60-day lock.
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| 5. |
A final consideration is your tax situation. Points may be tax
deductible for the tax year you refinance a home. (See your tax advisor.) If
you're planning to continue to live in a home for a long time, you may want to
use points to lower the rate. You could give yourself a substantial tax
deduction that year, plus reduce the cost of the loan to you over the long
term. Conversely, you may want to hold on to your cash by paying no points and
take advantage of the tax deductibility that comes with a higher rate each year
— a good strategy if you plan to sell in several years. |
Tips on Comparing Adjustable Rate Mortgages
Adjustable rate mortgages can be a little more tricky to compare because there
are so many out there with so many different features. Be sure to compare the
features to ensure the ARM you choose is the best product for you.
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| | Compare these ARM features |
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| Rate caps (periodic and life of loan) |
| | Financial index on which the rate is based
(you want stability) |
| | | Length of period between rate adjustments |
| | | Conversion features (ability to change to a fixed rate loan) |
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For more information on ARM features, see Loan Types.
Don't be swayed by rate alone
It's easy just to compare the APR of similar loans and make a choice. But
you're getting more than a loan. You're getting a long-term relationship with
your home loan company. You want to be confident that your home loan company is
properly handling your payments and accounts over the life of your loan.
Make sure you feel good about the company that's lending you the money and its
service. Consider asking if the company sells the servicing of its loans (i.e.,
handling of payments — many do) and decide whether you're comfortable with
that. Often it can inconvenience you, changing where you send your payments or
forcing you to set up a new automatic payment plan. Or, you may spend a lot of
time worrying about whether your payments were properly applied.
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