Looking for the Best Mortgage
Shopping around for a home loan or mortgage will help you to get the best financing deal. A mortgage--whether it’s a home purchase, a refinancing, or a home equity loan--is a product, just like a car, so the price and terms may be negotiable. You’ll want to compare all the costs involved in obtaining a mortgage. Shopping, comparing, and negotiating may save you thousands of dollars.
Obtain Information from Several Lenders
Home loans are available from several types of lenders -- thrift
institutions, commercial banks, mortgage companies, and credit
unions. Different lenders may quote you different prices, so you
should contact several lenders to make sure you’re getting
the best price. You can also get a home loan through a mortgage
broker.
Brokers arrange transactions rather than lending money
directly; in other words, they find a lender for you. A broker’s
access to several lenders can mean a wider selection of loan products
and terms from which you can choose. Brokers will generally contact
several lenders regarding your application, but they are not
obligated to find the best deal for you unless they have
contracted with you to act as your agent. Consequently, you
should consider contacting more than one broker, just as you should
with banks or thrift institutions.
Whether you are dealing with a lender or a broker may not always
be clear. Some financial institutions operate as both lenders and
brokers. And most brokers’ advertisements do not use the word
"broker." Therefore, be sure to ask whether a broker is
involved. This information is important because brokers are usually
paid a fee for their services that may be separate from and in
addition to the lender’s origination or other fees. A
broker’s compensation may be in the form of "points"
paid at closing or as an add-on to your interest
rate, or both. You should ask each broker you work with how he
or she will be compensated so that you can compare the different
fees. Be prepared to negotiate with the brokers as well as the
lenders.
Obtain All Important Cost Information
Be sure to get information about mortgages from several lenders or
brokers. Know how much of a down payment you can afford, and find
out all the costs involved in the loan. Knowing just the amount of
the monthly payment or the interest rate is not enough. Ask
for information about the same loan amount, loan term, and type of
loan so that you can compare the information. The following
information is important to get from each lender and broker:
Rates
- Ask each lender and broker for a list of its current mortgage interest rates and whether the rates being quoted are the lowest for that day or week.
- Ask whether the rate is fixed or adjustable. Keep in mind that when interest rates for adjustable-rate loans go up, generally so does the monthly payment.
- If the rate quoted is for an adjustable-rate loan, ask how your rate and loan payment will vary, including whether your loan payment will be reduced when rates go down.
- Ask about the loan’s annual percentage rate (APR). The
APR takes into account not only the interest rate but also points,
broker fees, and certain other credit charges that you may be
required to pay, expressed as a yearly rate.
Points
Points are fees paid to the lender or broker for the loan and are often linked to the interest rate; usually the more points you pay, the lower the rate.
- Check your local newspaper for information about rates and points currently
being offered.
- Ask for points to be quoted to you as a dollar amount--rather than just as the number of points--so that you will actually know how much you will have to pay.
Fees
A home loan often involves many fees, such as loan origination or
underwriting fees, broker fees, and transaction, settlement, and
closing costs. Every lender or broker should be able to give you
an estimate of its fees. Many of these fees are negotiable. Some
fees are paid when you apply for a loan (such as application and
appraisal fees), and others are paid at closing. In some cases,
you can borrow the money needed to pay these fees, but doing so
will increase your loan amount and total costs. "No cost"
loans are sometimes available, but they usually involve higher
rates.
- Ask what each fee includes. Several items may be lumped into one fee.
- Ask for an explanation of any fee you do not understand. Some common fees associated with a home loan closing are listed on the Mortgage Shopping Worksheet on the Federal Reserve
Web site (see link at bottom).
Down Payments and Private Mortgage Insurance
Some lenders require 20 percent of the home’s purchase price
as a down payment. However, many lenders now offer loans that
require less than 20 percent down--sometimes as little as 5 percent
on conventional loans. If a 20 percent
down payment is not made, lenders usually require the home buyer
to purchase private mortgage insurance (PMI)
to protect the lender in case the home buyer fails to pay. When
government-assisted programs such as FHA (Federal Housing
Administration), VA (Veterans Administration), or Rural Development
Services are available, the down payment requirements may be
substantially smaller.
- Ask about the lender’s requirements for a down payment, including what you need to do to verify that funds for your down payment are available.
- Ask your lender about special programs it may offer.
If PMI is required for your loan:
- Ask what the total cost of the insurance will be.
- Ask how much your monthly payment will be when including the PMI premium.
- Ask how long you will be required to carry PMI.
Obtain the Best Deal That You Can
Once you know what each lender has to offer, negotiate for the best deal that you can. On any given day, lenders and brokers may offer different prices for the same loan terms to different consumers, even if those consumers have the same loan qualifications. The most likely reason for this difference in price is that loan officers and brokers are often allowed to keep some or all of this difference as extra compensation. Generally, the difference between the lowest available price for a loan product and any higher price that the borrower agrees to pay is an
overage. When overages occur, they are built into the prices quoted to consumers. They can occur in both fixed and variable-rate loans and can be in the form of points, fees, or the interest rate. Whether quoted to you by a loan officer or a broker, the price of any loan may contain overages.
Have the lender or broker write down all the costs associated with the loan. Then ask if the lender or broker will waive or reduce one or more of its fees or agree to a lower rate or fewer points. You’ll want to make sure that the lender or broker is not agreeing to lower one fee while raising another or to lower the rate while raising points. There’s no harm in asking lenders or brokers if they can give better terms than the original ones they quoted or than those you have found elsewhere.
Once you are satisfied with the terms you have negotiated, you may want to obtain a written
lock-in from the lender or broker. The lock-in should include the rate that you have agreed upon, the period the lock-in lasts, and the number of points to be paid. A fee may be charged for locking in the loan rate. This fee may be refundable at closing. Lock-ins can protect you from rate increases while your loan is being processed; if rates fall, however, you could end up with a less favorable rate. Should that happen, try to negotiate a compromise with the lender or broker.
Remember: Shop, Compare, Negotiate
When buying a home, remember to shop around, to compare costs and
terms, and to negotiate for the best deal. Your local newspaper
and the Internet are good places to start shopping for a loan. You
can usually find information both on interest rates and on points
for several lenders. Since rates and points can change daily,
you’ll want to check your newspaper often when shopping for
a home loan. But the newspaper does not list the fees, so be sure
to ask the lenders about them.
The Mortgage Shopping Worksheet on the Federal Reserve web site (see link at
bottom) may also help you. Take it with you when you speak to each
lender or broker and write down the information you obtain. Don’t
be afraid to make lenders and brokers compete with each other for
your business by letting them know that you are shopping for the
best deal.
Fair Lending Is Required by Law
The Equal Credit Opportunity Act prohibits lenders from discriminating against credit applicants in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, age, whether all or part of the applicant’s income comes from a public assistance program, or whether the applicant has in good faith exercised a right under the Consumer Credit Protection Act.
The Fair Housing Act prohibits discrimination in residential real estate transactions on the basis of race, color, religion, sex, handicap, familial status, or national origin.
Under these laws, a consumer cannot be refused a loan based on these characteristics nor be charged more for a loan or offered less favorable terms based on such characteristics.
Credit Problems? Still Shop, Compare, and Negotiate
Don’t assume that minor credit problems or difficulties stemming from unique circumstances, such as illness or temporary loss of income, will limit your loan choices to only high-cost lenders.
If your credit report contains negative information that is accurate, but there are good reasons for trusting you to repay a loan, be sure to explain your situation to the lender or broker. If your credit problems cannot be explained, you will probably have to pay more than borrowers who have good credit histories. But don’t assume that the only way to get credit is to pay a high price. Ask how your past credit history affects the price of your loan and what you would need to do to get a better price. Take the time to shop around and negotiate the best deal that you can.
Whether you have credit problems or not, it’s a good idea to review your credit report for accuracy and completeness before you apply for a loan. To order a copy of your credit report, read the Real Life Debt.com page Fixing
Your Credit Report to learn how to get your latest report.
Source: Federal Reserve of the United States