Points:
Points are additional fees to essentially buy a lower interest rate. One point is defined as 1% of the total loan balance borrowed. For example, one point on a $100,000 loan is $1,000 ($100,000 x 1%). If you plan to be in your home for many years, consider paying points. If you can save $50 per month by paying 1 point (say $2,000 on a $200,000 loan), the payback period for the point is 26.67 payments of just over 2 years. Points paid can possibly be rolled into the amount of principal you borrow so there would be no additional money out of pocket.
APY:
Something else to look at is the Annual Percentage Yield (APY). This rate will be different from the rate that is actually applied to your loan. The APY is a better indicator of the true cost of the loan. It tells you the ‘real’ interest rate you will be paying after compounding and all other calculations. This rate should be within .25% (one quarter of a percentage point) to the rate the lender is advertising. There will always be a difference between the APY and the advertised rate, just make sure the difference between the advertised rate and the APY is consistent when you are comparing the two. For example, if all the APY’s are .5% (half of a percentage point) higher than the advertised rate – you are comparing rates consistently.
Fees:
There can be many fees associated with obtaining a mortgage loan. If you use a mortgage broker, some of the fees will be for their services. It is best to not try to negotiate out of this fee too much. The mortgage broker is providing you a valuable service and a good broker is worth every penny you pay him or her. Some other fees are Administration, Application, Commitment, Document prep, Funding, Mortgage Broker fee, Processing, Tax Service, Underwriting, Wire Transfer, Appraisal, Credit Report, Survey, and Title fees. These are the most common fees and can total up to $2,000.
PMI:
PMI stands for Private Mortgage Insurance. A lender will require you to purchase (or purchase for you) this insurance if you do not have a minimum of a 20% down payment. This insurance is typically funded through your escrow payment, or the amount added to your principal and interest each month to pay for PMI, taxes, etc. You can still obtain a loan without the 20% down payment but PMI will be required until the value of your loan is 80% or less of the value of your home. You can have an appraisal performed any time you wish (and at your own expense) if you believe you are at 80% or less, and then request the PMI be dropped with the appraisal as proof of the value of your property.