What is True Cost?
True Cost is a new feature on Zillow Mortgage Marketplace (ZMM) that is an apples-to-apples comparison of custom quotes you receive on ZMM. It incorporates interest rate, fees, points, and time into one easy-to-compare number. This number is the sum total you will pay during the expected time you will keep the loan. We call it True Cost, because it is the amount of money you will never recoup. Also, True Cost does not include the principal accumulated, since principal is not an outright cost, but rather, it is equity that you will likely get back when you sell your home. However, we display the amount of accumulated principal as an additional number to consider, because principal will grow at varying rates depending on loan program.
How does it work? (How do I use it?)
Select how long you plan to stay in your home and Zillow calculates how much you will pay in interest and fees over that time period. Sort the least expensive loans for the given time period to the top of the list. You can also adjust the time dropdown to see costs if you end up keeping the loan longer or shorter than you expect.
Why is it important to look at a True Cost calculation? Shouldn't I just use rate and fees?
When comparing mortgage quotes, most borrowers focus on two factors: interest rate and upfront fees. But it's difficult to determine whether it makes more sense to choose a loan with a lower rate and higher fees, or a loan with higher fees and a lower rate. The best combination depends on how long you will have the loan.
For example, a lower rate with higher upfront fees may make the most sense if you keep your loan for 20 years, but low fees with a higher rate may be a better way to go if you are only staying in your home for 4 years.
True Cost calculates these tradeoffs between rate and fees and does the math for you. It helps you find the least expensive loan for your expected timeframe based on rate and fees.
How does True Cost help you compare across loan programs?
If you don't know the best loan program is for your situation, True Cost helps you make that decision by factoring in how long you will stay in the home.
For example, if you plan on being in your home for 5 years, programs with shorter time periods, such as 5/1 or 7/1 ARMs, may rise to the top of the list, because these loan programs typically have lower interest rates. If it's likely that you will stay in your home for a longer period of time, you can select different time periods in the drop-down menu to see which loan programs are least expensive for each scenario. This flexibility is important, since the ideal loan program and fee/rate structure may change depending on the time you plan to stay in your home.
How does Zillow calculate True Cost?
We calculate True Cost by generating amortization tables for every loan program. The amortization (the gradual pay-off of the loan) changes each month throughout the life of the loan. In the beginning, a greater portion of your monthly payment goes toward the interest, and as time goes on, you pay less in interest and more in principal. The amortization schedule is different depending on the type of loan and the amount you will pay in interest and fees, and it will vary depending on how long you stay in the home.
We use amortization tables to sum interest, fees, and mortgage insurance for various timeframe scenarios for each quote. Then, we instantly provide these calculations for you to compare.
Won't ARMs with lower rates or shorter term loans always be the cheapest?
ARM loans typically have lower rates than longer fixed loans, but that does not mean they are always cheaper. Because the rates for ARM loans are only fixed for a short period, there is a risk that the rate could increase when the ARM resets. The True Cost calculates the worst-case scenario for ARM resets so you can see what could potentially happen with respect to costs over various time periods. This is why you may notice that ARM loans look better during their fixed-time period, but look more expensive over 30 years.
However, 15-year fixed loans will almost always look less expensive than 30-year fixed loans, because they are amortized over a shorter period, and therefore, you end up paying less interest. The downside of these types of loans is that they result in higher monthly payments, and many buyers cannot afford these higher payments. We recommend that you first sort by True Cost, then use the monthly payment filter to filter out loan quotes with payments that are above your monthly budget.
What about Annual Percentage Rate (APR)?
Annual Percentage Rate (APR) was devised as way to help borrowers compare quotes. However, the APR calculation for Adjustable Rate Mortgages (ARMs) assumes interest rates remain constant at their current level and loans are held for their full terms. Since rates vary and loans are held for only 3-4 years on average, these assumptions can be misleading and may cause borrowers to select an unnecessarily expensive loan. Accurate cost calculations must be based on the amount of time you plan to keep your loan.
Why does Zillow also show Principal if it is not part of True Cost?
True Cost is the sum of interest and fees during your expected time frame for keeping the loan. We display the principal paid as an additional number to consider but do not include it in the True Cost calculation since it's not an outright cost, but rather, it is equity that you will likely get back when you sell your home. Because you will be paying more toward principal and have more equity in your home with certain loan programs than with others, we think showing principal paid is something you should consider when selecting the loan that's best for you.
Should I only use True Cost as selecting a loan?
Use True Cost as your starting point to find the least expensive loans, then use the monthly payment and fees filter to remove quotes you cannot afford. Once you have a couple of quotes you like, check out the lender profiles, reviews, and ratings and select a couple of lenders to contact.