The lowdown on how loans really work.

Clients often ask for “the lowest rate and lowest payment.” Sounds like a good thing, right?

But if you look under the hood, you’ll find that the lowest rate and payment are often not the best deal! To understand why, you need to know how rates and fees affect each other. We call this the Teeter Totter.

The lower the fees, the higher the rate.

The higher the fees, the lower the rate.

Why is this important? Because you have choices about how your loan is structured. You can choose a lower rate with higher fees, or vice versa. Depending on your current situation and future plans, one loan structure will be a smarter financial decision for you than another.

Should you “buy down” your interest rate?

You can “buy down” your interest rate by paying points. (One point is 1% of the loan amount, and fall under the category of “fees.”) Higher fees (points) buy you a lower rate. The question then becomes, “when does this deal break even?” The breakeven point is the number of months you will pay on the loan before you save enough in interest to pay for the points.

For you number crunchers out there, here’s an example.

Let’s say you’re looking at a loan amount of $285,000. You qualify for a rate of 4% with zero points. Now suppose you want to “buy down” your rate to 3.75%, and this will cost 1 point, or $2850.

At an interest rate of 4%, your monthly payment (principal and interest) is $1360.63. At an interest rate of 3.75%, your monthly payment (principal and interest) is $1319.88. The difference between the two payments is $40.75. If you take the 1-point cost to buy down your interest rate – $2850 – and divide it by the difference in the monthly mortgage payments – $40.75 – you get the number of months it will take to break even.

In this example, 2850 divided by 40.75 is 69.94. So 69.94 is the number of months where you break even – or 5.83 years. So, after 5.83 years, this strategy saves you money. But if you sell or refinance before 5.83 years, then this strategy costs you money, and you would have been better off paying the 4% rate. Or, perhaps you have a better use for that $2850 right now, in which case you would opt for the higher rate and save paying the point. Or, with many loan programs, you can add the point to the loan balance, so no upfront cost. It’s your choice.

We help you understand your options.

Most lenders take a cookie-cutter approach to borrowers and loans. They don’t explain how loans work, or what your options are. We’re different – we take the time to explain your options so you can make an informed decision. Our goal is to help you get the best loan for your situation.

Low rates and low fees. You’ll get both at Catalyst.

Anyone can quote you an ultra-low interest rate. They key is how much you’ll have to pay in fees to get that low rate. At Catalyst, you’ll get low rates and low fees. That’s why we beat other lenders 9 times out of 10.