In the market for a home mortgage? You might be tempted to listen to your realtor or mortgage broker, but this is much too large a loan not to be an active participant. You have to shop around – just as you would for a car or even something much smaller like a refrigerator.
If you feel more comfortable dealing with larger companies, you may look at two of the largest mortgage lenders in the United States. Bank of America and Wells Fargo offer similar mortgage services. We did a side-by-side comparison of two of their mortgage offerings to see how they stacked up. Each loan was for a $250,000 existing home in Florida with a 5% down payment. All figures are based on rates as of February 2015.
30-Year Fixed-Rate Mortgage: Advantage, Bank of America
The first was the standard 30-year fixed-rate mortgage. Wells Fargo offered an APR of 4.342% – higher than Bank of America. The total loan amount was listed at $237,500 with a payment of $1,240. Closing costs were $8,007 for a total payment at closing of $20,507. Over the life of the loan, you will pay about $424,600.
Bank of America offered an APR of 4.26% with 0.46 of discount points. The company estimates that the monthly payment will be $1,231. Expect closing costs of about $6,398 for a total due at payment of $18,898. Over the life of the loan, you will pay about $420,000.
5/1 ARM Mortgage: Advantage, Bank of America
Next, the 5/1 ARM (adjustable-rate mortgage). This type of mortgage locks in your payment for five years. In year six, the interest rate begins to adjust on an annual basis, often based on the prime rate plus a margin. Rarely will the payment not rise. People who choose a 5/1 ARM either don’t plan to stay in the home for more than five years or will probably refinance at the end of the 5-year period. Note that the monthly payments are lower, but the ultimate costs over 30 years if you keep the loan are likely to be higher than with a fixed-rate mortgage at a decent interest rate.
Bank of America offers a 5/1 ARM with an APR of 3% and 0.211 of discount points. The payment is $1,132. Expect closing costs of $5,831 for a total due at closing of $18,331. The total cost over 30 years, if you continued with the loan at its new interest rate(s), could be more than $512,000 based on projected increases. (Disclaimer: It's impossible to calculate the total cost accurately because no one can predict how interest rates will change over time.)
Wells Fargo offers an APR of 3.474% and a monthly payment of $1,173. Closing costs come in at $7,661 for a total due at signing of $20,161. The total cost over 30 years, if you kept this loan, could be more than $520,600 based on projected increases. However, the interest rate cap is lower than Bank of America's, something to consider if you think you might keep the loan beyond the original time period.
The Bottom Line
Wells Fargo and Bank of America were about $1,800 apart on closing costs and total due at signing.
While the interest rates are different, the fact that Bank of America works discount points into the calculation makes the comparison more difficult. For a fairer comparison, compare the total cost over the life of the loan. Based on that, Bank of America seems to come out ahead, though this might not be true for your situation.
Finally, keep in mind that some people who are trying to sell you on a certain lender are receiving commissions. Although they should have your best interest at heart, that isn’t always the case. Make sure that you do all of your own research and shop for mortgages on your own in addition to listening to others. For more on mortgages, see How To Shop For Mortgage Rates and our tutorial Mortgage Basics.