How To Compare Mortgage Loan Offers
Comparing mortgage loans is one of the smartest things you can do to ensure you’re making an informed decision about a financial matter that will affect your life for years to come—maybe decades. Put it that way and it only makes sense to sit through some uncomfortable conversations with a few loan officers. But don’t worry, we’ll make it worth your time. Here are the steps to take:
1. Get Home Loans Quotes
The first step in making a loan comparison is to get multiple loan offers. Your loan officer can likely show you several options at once. Alternatively, you can approach several potential mortgage brokers and increase your options. Just remember, the mortgage brokers make money too, so make sure you clarify with them how they are getting paid.Make sure you also like them, you are going to be spending a lot of time talking to them and trusting their advice and guidance during this process.
2. Compare Loan Offers
Once you’ve gotten several loan offers, you’ll want to compare them. Unfortunately, lenders don’t make it easy. Comparing two loan offers is like comparing apples to oranges. You’ll likely see that one lender has a lower rate, but perhaps has more fees. This is where the hard work comes in. It’s your job to look at the rates, points, and fees associated with each loan, and determine which is the best.
Here’s what you’ll want to consider: Look closely at interest rates, terms, characteristics and costs, and other factors that might apply to your individual situation, like if you get along with a particular lender, or have friends who’ve had positive dealings with a lender. A mortgage lender is a critical part of your team (including your agent and attorney) so you’ll want to make sure that they are not only someone you like and trust but that they will operate as a team player within your team.
3. Compare Interest Rates
An interest rate is a percentage applied to a loan balance to determine how much the borrower will pay each month to borrow that sum of money. A lower rate equals a lower payment for the same loan amount. For example, the monthly principal and interest payment for a $250,000 loan with a 4.5 percent interest rate is $1,267. The monthly payment for the same loan with a 5.0 percent interest rate is $1,342.
In addition to the stated rate, which is used to calculate your monthly payment, you’ll want to carefully compare the annual percentage rate, or APR. The APR is a better indication of the true cost of borrowing. For example, if both the 4.5 percent loan and the 5.0 percent loan came with identical costs, the 4.5 percent loan is obviously the better deal. But what if the 5.0 percent loan costs nothing, while the 4.5 percent loan costs $15,000? In this case, the APR for the 5.0 percent loan is 5.0 percent. The APR for the 4.5 percent loan? It’s 5.004 percent. APR allows you to compare loans with different rates and pricing.
4. Compare Loan Terms
In addition to the mortgage rate, borrowers should compare home mortgage-rate-lock periods, repayment periods, mortgage insurance costs, prepayment penalties, discount points and other characteristics.
Rate Lock: A rate lock period refers to how much time the borrower has to close the loan and receive that rate after it has been locked. A longer lock period is more valuable than a shorter one because the longer lock allows the borrower more time to complete the loan process. A lock that expires can sometimes be extended (usually for a fee).
Term: The repayment period (or term) is the number of years over which the loan must be repaid. A longer term comes with a lower payment but higher total interest costs over the life of the loan. A shorter term for the same loan involves a higher payment, but a faster payoff means less interest is paid. Most home loans have a 30-year or 15-year term.
Prepayment Penalty: A prepayment penalty is an extra sum a borrower could be charged to pay off a loan early. “Hard” prepayment penalties are assessed if the loan is repaid ahead of time for any reason – for instance, selling the home. “Soft” prepayment penalties are assessed only if the loan is paid early by a refinance. A loan with a prepayment penalty almost always has a lower interest rate than the same loan without a penalty. Mortgage Insurance: Mortgage insurance, or MI, is a policy borrowers pay for each month to reduce the lender’s risk. If the borrower defaults (doesn’t pay the mortgage), the insurer reimburses the lender. Mortgage insurance is required for most loans exceeding 80 percent of the purchase price (or property value, for a refinance). Without MI, many people would need a much larger down payment to buy a home.
Adjustments: Fixed rate mortgages (FRMs) have rates that do not change during the life of the loan. They make budgeting easier and are considered safer by many experts. If you plan to keep your loan for many years, an FRM may be less expensive. Adjustable rate mortgages (ARMs) come with lower interest rates upfront, but eventually, they adjust up or down, depending on the economy, at predetermined intervals. ARMs can be much cheaper, though, for those who don’t plan to keep their mortgages for many years.
5. Compare Loan Costs
All mortgage loans involve fees and costs. Examples include loan origination fees, title search, and title insurance costs and appraisal fees. Lenders are required by federal law to disclose most loan costs to the borrower on what’s known as a Good Faith Estimate (GFE). Borrowers can use the GFE not only to compare mortgage loans and costs, but also to reconcile the estimated costs to the final costs, which are disclosed on another form known as the HUD-1 Settlement Statement. HUD refers to the U.S. Department of Housing and Urban Development, which designed the closing document.
In order to get the best deal on your loan, consider negotiating. This makes most people uncomfortable but, remember, this is a financial transaction for the lender and they want to do what they can to ensure you choose them. For instance, you might negotiate a better interest rate, or closing costs. Also, don’t be afraid to ask your lender or broker to waive or reduce fees, or agree to a lower interest rate or fewer points. Make sure the lender or broker isn’t agreeing to lower one fee while raising another, or lowers your rate by increasing your points. You have nothing to lose by asking lenders or brokers if they will provide you with better terms than the original terms they quoted, or to compete with terms you found through other lenders or brokers.
Here’s what’s on the Good Faith Estimate (GFE) and open for negotiation:
- Interest Rate
- Lender fees—including origination, processing, underwriting, document drawing and courier charges
- Title insurance
- Escrow charges
- You should get a new GFE any time there’s a “material” change to your loan application. If you switch programs, for example, or when you lock in your mortgage rate.
Charges that cannot be negotiated include:
- Transfer Taxes
- Government recording fees
- The appraisal fee
- The charge for your credit report
7. Obtain the best deal
Once you have several offers in hand, and can intelligently look at each one, it’s time to pick the best deal you can. Keep in mind that mortgage rates change daily, and so will the cost of your loan. Once you’ve negotiated a deal you’re happy with, you may want to obtain a written lock-in from the lender or broker. Make sure the lock-in includes:
- The interest rate
- The lock-in period
- Points to be paid
Find out if a fee is charged for locking in your rate. In some cases, this fee may be refundable at closing, so find out. Lock-ins can protect you from rate increases while your loan is being processed, However, if rates go down before you close, you’ll pay more for your mortgage.
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