Originally posted by: Triumph
That's fine, but the APR's are not close, I understand what the terms mean but I don't understand what you mean when you say they're all the same.
Here is a link for your area with a $165,000 mortgage. I included the first three results that I got from the website, otherwise they are in no particular order. I used $165,000 since that was the default for the website. Your particular data may be different.
From what you can see, the "APR" on those three products is vastly different. They range from 4.77 to 5.41. So, like you said, at first glance, they don't look close. But, these three products aren't as different as they look. First of all the APR isn't the interest rate, that is in the column called rate which in reality vary from 4.5% to 5.25%. Still a big difference. But, if you look at the last column, that only affects your monthly payment by $75 ($911 - $836 = $75).
Lets look at the fees.
1) The top product has 2 points (1.000 origination and 1.000 discount). Thus, to borrow $165k, you'll pay 2*$165,000 / 100 = $3300 in point fees for this product. Also, see there is a fee column that list $1883 in other fees. So, to get that product, you'll have to start off paying the bank $5183. That doesn't include the down payment and it doesn't include the other closing costs (which could be a couple thousand dollars).
2) The total fees for the middle product are $2844.
3) The total fees for the bottom product are $2889.
Thus, if we compare #1 to #2. In the top product you have a 4.5% interest rate only if you give the bank $5183 of your cash. In the middle product, you have a 5.25% interest rate only if you give the bank $2844 in cash. The fees for the top product are $2339 higher. You are paying for that lower interest rate with a lot of your money up front (right when the money is probably the most dear to you). It would take 31 months to gain back that $2339 at $75 per month.
But that isn't all of the picture. Since most people don't have 20% down + closing costs + renovation costs + new furniture costs + bank fee costs, they borrow the bank fees by tacking them into the mortgage. So we shouldn't compare a 4.5% loan at $165,000 to a 5.25% loan at $165,000. Instead we should compare a 4.5% loan at ($165,000 + $5183) to a 5.25% loan at ($165,000 + $2844). The loan itself is smaller with the higher interest rate.
In this case, the REAL monthly payments are $862 for the top product and $927 for the bottom product, only a $65 difference not $75 like it orignally looked. But you are also paying interest on that $2339 in extra fees every month. So, it'll really take 76 months for the top product to finally catch up with the middle product (over 6 years).
If you sell the house sooner than 76 months, the middle product with a 5.25% interest rate is CHEAPER than the top product with 4.5% interest rate. If you sell the house later than 76 months, the top product is CHEAPER than the middle product. And in most cases, the difference between the two is very small (other than if you sell at the very extremes like right away or 30 years down the line).
Of course, the real winner is option #3 on the bottom. The fees are as low as option #2, but the interest rate is almost as low as option #1. Only if you keep the house for 16+ years will option #1 finally approach being as good as option #3. But even then, in most cases the difference works out to only be an average of a few dollars a month which is quite small compared to the ~$1000/month payments you'll be making.
* Note: I'm ignoring income tax differences which in the case of buying a house at the end of the year are probably quite small (if any).
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