Buying a home is one of the most important decisions in a person's life. It can also be one of the most stressful experiences, given the amount of money involved, the different types of homes, mortgages, and terminology that goes into buying a house.
In buying a home, you might be tempted to listen to your realtor or mortgage broker, but a home loan is too large of a debt not to be an active participant in. It's important to shop around, just as you would for a car or even something much smaller like a refrigerator, to see what your options are and what suits your needs best.
There are a tremendous amount of mortgage providers, some large, some small, that all offer different rates. On top of that, they also offer different types of mortgages. Doing your research will help you find the one that is best for you.
If you feel more comfortable dealing with larger companies, you may look at two of the largest mortgage lenders in the U.S.—Bank of America and Wells Fargo. The following is a side-by-side comparison of two of their mortgage offerings to see how they stack up against each other. Each loan was for a $200,000 existing home in Florida with a 25% down payment. All figures are based on rates as of April 2020.
- Bank of America and Wells Fargo are two of the nation's leading mortgage loan companies.
- Bank of America currently offers the superior 30-year fixed-rate mortgage loan between the two.
- Wells Fargo is the leader when it comes to 5/1 adjustable-rate mortgages (ARM) in terms of interest rates.
30-Year Fixed-Rate Mortgage: Bank of America Wins
The first point of comparison is the standard 30-year fixed-rate mortgage. Bank of America offers an annual percentage rate (APR) of 3.397%, compared to Wells Fargo's 3.458%. Bank of America's 30-year fixed loan amount was listed at $150,000 with a payment of $653. Over the life of the loan, you will pay about $235,000. At closing, the Bank of America loan includes 0.611 discount points. Wells Fargo offered an APR of 3.458%. The company estimates that the monthly payment will be $884. Over the life of the loan, you will pay about $318,000.
5/1 ARM Mortgage: Wells Fargo Wins
Next is the adjustable-rate mortgage (ARM), specifically the 5/1 ARM. 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 plan to refinance at the end of the 5-year period. Note that the monthly payments are lower, but the total cost over 30 years (assuming you keep the loan) will likely be higher than a fixed-rate mortgage.
Bank of America offers a 5/1 ARM with an APR of 3.424% and 0.948 of discount points. The payment is $653. Wells Fargo offers an APR of 3.382% and a monthly payment of $870. The total that the interest rate can move over the life of the loan, either up or down, for Wells Fargo is 5%. Bank of America's cap is higher at 6%, but Bank of America has individual caps of 2%—i.e. no individual rate adjustment can be more than 2%.
In this instance, Wells Fargo wins because they offer a better interest rate, however, Bank of America offers discount points, which means the upfront closing costs will be higher if a home buyer choose to pay more upfront, which reduces the loan's interest, thereby reducing monthly payments.
The Bottom Line
The Wells Fargo and Bank of America loans do not include closing costs, which can vary by lender. 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.