How to compare two mortgage offers
Two offers are comparable when the loan amount, the term, and the product match. The cheaper one over the years you will keep it is not always the one with the lower note rate, and it is not always the one with the lower annual percentage rate.
A Loan Estimate is built so two lenders’ offers can be read in the same places. The Consumer Financial Protection Bureau’s shopping guidance says to ask more than one lender for the same kind of loan, then compare the loan amount, the interest rate, the principal-and-interest payment, any mortgage insurance, the full monthly payment, the origination charges, the lender credits, and the cash to close. Page 3 adds the annual percentage rate and an “in 5 years” line. The loan comparison calculator takes the note rate, the points, the other lender fees, and how many years you expect to keep the loan. It does not read a form. The rate in the example is typed. It is not a quote.
The note rate and the APR measure different things
The interest rate on page 1, under loan terms, is the note rate. The principal-and-interest payment is calculated from that rate, the loan amount, and the term. The annual percentage rate, on page 3 under comparisons, folds in points, broker fees, and other charges you pay to get the loan. The CFPB says the APR is usually higher than the interest rate for that reason. A loan with a lower note rate and higher points can have a higher APR. Use the note rate when you compute the payment. Use the APR, together with the itemized charges, when you compare the cost of getting the loan.
The CFPB also flags comparisons where the APR is a weak summary. On an adjustable-rate loan, the APR does not reflect the maximum rate the caps allow. Comparing a fixed-rate APR with an adjustable-rate APR, or comparing two different adjustable loans by APR alone, leaves out the later adjustments. Comparing a closed-end loan’s APR with a home-equity line’s APR is a different mismatch, because the line’s APR is computed without the same fees. The APR is one line. It is not the whole offer.
A point is one percent of the loan amount, paid at closing, in exchange for a lower note rate than the same lender would charge on the same kind of loan with fewer points. A lender credit does the reverse: a higher note rate, and money toward closing costs. The CFPB’s explanation of that tradeoff is to look at the cost over a short stay, a long stay, and the stay you think is likely. The calculator’s horizon is that stay, in years.
Match the loan before you match the price
The CFPB says a difference in rate between two Loan Estimates issued on different days can be the market moving, not a different lender. Check whether the rate is locked, and until when. An unlocked rate can change before closing. Also match the product. A 15-year loan and a 30-year loan at the same rate have different payments and different totals. An offer with mortgage insurance and an offer without it are not the same monthly bill even when the principal and interest match.
When you compare closing costs, the CFPB says to focus on charges the lender controls: origination in section A, the services the lender requires in section B, and lender credits in section J. Taxes and insurance can differ on two forms because the estimates differ. The lender does not set them, so a lower tax estimate is not a cheaper loan. Cash to close includes the down payment and the credits. It is the check, not the price of the debt. The cash to close guide separates those totals. This page is about the cost of borrowing after the loan amount is the same.
Page 3’s “in 5 years” line has two numbers. The first is what you will have paid in principal, interest, and mortgage insurance. The second is how much of that paid the balance down. Subtract the second from the first and you have the interest and mortgage insurance paid over five years, which is the comparison the CFPB suggests, along with the upfront fees. The calculator’s cost over the horizon is the upfront lender charges you type, plus interest through that month. It does not include mortgage insurance, tax, or principal. Principal you repay is your equity, not a cost of borrowing. Adding it into both loans does not change which loan costs less in interest, but it does change the dollar figure, so the calculator’s total will not match the first number on the form.
Worked example
Both loans are $300,000 for 30 years. Loan A is a note rate of 6.75% with no points and $1,200 in other lender fees. Loan B is a note rate of 6.25% with 1.25 points and the same $1,200 in other fees. The horizon is 5 years. Nothing else, including mortgage insurance, is in the comparison.
- Upfront cost is points times the loan, plus the fees. Loan A: $1,200.00. Loan B: $4,950.00. The points loan costs $3,750.00 more at closing.
- Principal and interest. Loan A: $1,945.79 a month. Loan B: $1,847.15 a month. The difference is $98.64 a month.
- Over 5 years, interest on loan A is $98,374.89 and interest on loan B is $90,840.83. Add the upfront cost and the cost of borrowing to that point is $99,574.89 on loan A and $95,790.83 on loan B. The points loan costs less over that horizon, by $3,784.06.
- The month the higher upfront cost is recovered, counting interest after that, is month 30 (2 years 6 months). Before that month, the no-points loan has cost less. After it, the points loan has.
- If both loans are kept for the full 30 years, upfront cost plus all interest is $401,689.69 on loan A and $369,925.80 on loan B. The balances at the 5-year mark are $281,627.49 and $280,011.83. A lower payment leaves a different balance, so “paid less each month” is not the same statement as “owe less.”
The break-even month is the point where the running total of upfront cost plus interest crosses. It is not a promise you will keep the loan that long. Selling, refinancing, or paying the balance off moves the comparison to the month that actually happens. The points calculator asks only the points question, one loan at a time. This comparison holds two whole offers.
What a side-by-side still leaves open
Mortgage insurance, prepayment penalties, a balloon, and an adjustable rate after the fixed period are on the Loan Estimate and are outside this example. An offer that is cheaper on principal and interest can be more expensive once mortgage insurance is included. An adjustable offer that looks cheaper in year one can cost more after the first reset. The CFPB says to look at the worst case the adjustment allows, not only the start rate.
Lender credits and points are lender-specific. A point at one lender is not the same rate reduction as a point at another. Comparing a one-point offer from one company with a zero-point offer from another mixes the price of the point with everything else that lender charges. The clean reading is two forms on the same amount, term, and product, issued close enough together that the rate lock, not the calendar, explains the rate.
The form is an estimate until the Closing Disclosure. The CFPB says to compare the APR on the disclosure with the APR on the Loan Estimate as one check that costs moved. Some fees cannot increase, some can increase by a limited percent, and some are not limited. A calculator result changes only when you change an input. It will not notice that a tolerance was missed.