How to Compare Quotes and Trade Off between Interest Rate and Fees

July 29, 2009 · Posted in News For Homebuyers

When comparing mortgage quotes, most borrowers focus on two important factors: interest rate and lender fees. While these two numbers together describe the cost of a mortgage, making apples-to-apples quote comparisons can be difficult because every quote may have different rate and fee trade-offs. Should you choose the mortgage with a 0.25% higher rate but $1,000 less in fees? Or should you pay a point for a lower rate? This decision can become even harder when you receive 40 or more competitive quotes on Zillow Mortgage Marketplace.

The Problem with APR
An initial solution, the Annual Percentage Rate (APR), was devised as way to help borrowers compare quotes. However, the APR calculation for Adjustable Rate Mortgages (ARMs) assumes interest rates remain constant at their current level and loans are held full-term. Since rates vary and loans are held only for 3 to 4 years on average, these assumptions can be misleading and may cause borrowers to select an unnecessarily expensive loan. What borrowers need is an accurate cost calculation based on the amount of time they plan to keep their loan. For example, a lower rate with higher fees may make the most sense if you keep a loan for 20 years, but a higher rate with low fees may be a better way to go if you are only staying for 4 years.

True Cost
The best way to directly compare quotes is to look at the actual price of the loan (interest paid + upfront fees) over a specific time period. This True Cost comparison is what we now offer on the custom Quotes Received page in Zillow Mortgage Marketplace. You select how long you plan to keep your loan, and we calculate how much you will pay in interest and fees over that time. True Cost incorporates interest rate, fees, points, and time so you can compare loans apples-to-apples! Since True Cost allows you to identify the cheapest loan over the selected time period, we think it is the best way to start your loan shopping experience.

Remember, even with the new True Cost column, you should still filter out loan quotes with monthly payments or fees you cannot afford. You should also consider your risk tolerance (learn more about ARMs) and the reputations of the lenders providing your quotes. Help articles, lender ratings, and lender profile pages on Zillow Mortgage Marketplace continue to be great resources for helping you decide which loan is best for you.

Notes regarding True Cost:

True Cost does not include principal because principal is not an outright cost, but rather, it is equity that you will likely get back when you sell your home.
The calculated interest amount for ARM loans assumes the worst case interest rate scenario. This means ARM loans will look worse after their initial fixed period ends.
If you select different years in the True Cost drop-down, you will notice the quotes with the lowest True Cost may change due to their combinations of rate, fees, points, and loan program.