Two term sheets with different rates can produce very different total costs, and the cheaper rate is frequently not the cheaper loan. The variables that decide it are points, prepayment structure, and how long you actually hold.
These questions cover how to compare offers properly.
Quick answer
Compare offers on five dimensions: rate for your actual file, total cash at closing including points, prepayment structure measured against your real hold period, reserve requirements, and conditions affecting your timeline. Then apply your actual holding assumption.
Frequently Asked Questions
Why isn't rate enough to compare offers?
Because points hit your cash at closing, prepayment penalties can cost thousands on an early exit, and reserve requirements tie up capital. Any of these can outweigh a modest rate difference.
What should I compare?
Rate for your specific file, points and lender fees, prepayment penalty structure, reserve requirement, loan-to-value offered, and any conditions that affect your closing timeline.
How do I compare a low-rate high-point offer against the reverse?
Calculate the break-even. Divide the extra points by the monthly payment saving. If the break-even exceeds your realistic hold period, the higher-rate option is cheaper.
How does hold period change the comparison?
Dramatically. A loan with two points and a lower rate wins over ten years and loses over two. Your intended hold is the single most important input to the comparison.
Should I get quotes from multiple lenders?
Generally yes, particularly on larger loans. Ask whether each can assess your scenario without a hard credit pull so you are not accumulating inquiries.
Do all lenders quote on the same basis?
No, and this is where comparisons go wrong. One lender may quote assuming a five-year prepayment penalty and another assuming none. Confirm the assumptions behind each number.
What is APR and is it useful here?
APR incorporates certain costs into an annualized rate. It is more useful on consumer mortgages than investor loans, where prepayment structure and hold period matter more than APR captures.
How do I compare offers with different loan amounts?
Convert to total cost over your hold period rather than comparing rates. Different loan amounts also produce different coverage ratios and cash requirements, which affects the deal beyond the loan.
Should I choose the lender offering the highest leverage?
Not automatically. More leverage means less cash in, but a higher payment, a lower coverage ratio, and often worse pricing. Model the cash flow at each leverage level.
How much does reserve requirement matter in comparison?
More than investors expect at scale. A lender requiring twelve months rather than six ties up meaningful capital that could fund your next down payment.
What conditions should I look for on a term sheet?
Appraisal requirements, which rent figure will be used, insurance minimums, entity documentation, and anything that could delay or reprice the loan.
Is the fastest lender worth a higher rate?
Sometimes, particularly in a competitive purchase where speed determines whether you get the property at all. Speed has genuine economic value in some transactions.
Should I tell lenders I'm comparing offers?
There is nothing wrong with it, and many lenders will sharpen a quote if they know they are competing. Be accurate about competing terms rather than inventing them.
What if one offer looks too good?
Examine what is different. Unusually low rates often come with longer prepayment penalties, higher points, tighter leverage, or conditions the other lenders did not require.
How do I compare a broker quote to a direct lender quote?
On identical dimensions — total cost, prepayment structure, reserves, and timeline. Broker compensation is disclosed on your documents, so ask how it factors into the pricing you are seeing.
Does customer service belong in the comparison?
It should. Whether you can reach a decision-maker when something goes wrong mid-file has real value, particularly on time-sensitive or complex transactions.
Should I always pick the cheapest option?
On identical terms, yes. But if one lender's overlay fits your file and another's does not, the cheaper quote is irrelevant if it will not close.
How many offers should I get?
Two or three is usually sufficient to establish the market for your file. Beyond that the marginal information is limited and the time cost rises.
What is the most common comparison mistake?
Comparing headline rates without checking whether each quote assumes the same prepayment term, leverage, and credit tier. Different assumptions make the numbers non-comparable.
How do I make a fair comparison quickly?
Ask each lender for the same thing: rate, points, prepayment structure, reserve requirement, and maximum leverage for your specific file. Put them side by side and apply your hold period.
