ABA Family Legal Guide

Buying and Selling a Home

Financing a Home Purchase

Applying for a Loan

Does it pay to shop around for an interest rate?

Since lenders are competitive, it pays to compare what several have to offer. Interest rates and fees charged to originate a loan may also vary among financial institutions. It may be possible to obtain a lower interest rate if the lender charges the prospective buyer a fee to obtain the loan, either as a flat fee or a percentage of the loan. As noted earlier, a point refers to a percentage point (one point is 1 percent of the loan amount).

One lender might offer an 8 percent, thirty-year fixed-rate loan with a flat fee of $200. A second lender might offer a 7 percent, thirty-year fixed-rate loan with two points. A third lender might offer the loan without points or other fees but at a higher interest rate. This could be advantageous for a buyer who wants to put as much as possible into the down payment. Another buyer might prefer to pay higher points in exchange for a lower interest rate because the IRS allows points to be deducted against taxable income in the year the home is purchased (although the IRS does not allow a deduction in a single year for points paid in connection with a refinancing--the deduction is spread out over the life of the loan).