Shopping around for mortgage deals can save you thousands of dollars, if you follow just a few simple steps. Remember that a mortgage is simply another product, like a car or a television, so the costs involved can differ greatly depending on who you shop with. To obtain the best mortgage deal, just follow this simple 3-step plan: Shop, Compare, and Negotiate.
Shop Lenders
Loans are offered by many types of lenders, and each lender offers different rates and specializes in different types of loans, such as adjustable rate mortgages or second mortgages. Your goal is to obtain at least three quotes from different lenders. Check with each type of lender in your area, and over the internet. For example, if you overlook your local credit union, you may be missing out on a great mortgage deal.
Remember to include these types of lenders in your search:
- Savings banks and savings and loan associations
- Commercial Banks
- Mortgage Companies
- Credit Unions
Mortgage Brokers
Another good option is to contact mortgage brokers in your area. Mortgage brokers do not lend money directly. Rather, they contact lenders to find cheap mortgages for you. One advantage for you is that a broker has access to many lenders, which means a wider selection of mortgage deals and rates for you to choose from.
Some companies act as both lenders and brokers, so it is not always clear if a broker is involved in a mortgage deal. If so, they are usually paid a fee for their services, which might increase the total loan fees you will be required to pay. Always ask if a broker is involved in any mortgage deal, what the fees are, and how they are compensated, so that you can make a fair comparison between different deals.
Compare Deals
In order to compare mortgage deals, you need to collect certain key information from each lender or broker in a format that makes it easy to compare. Use the Mortgage Shopping Worksheet (below) to help you collect and compare the information you receive. Take it with you when you visit each lender or broker and use it to record the information you obtain.
Start with the basic information regarding the terms of the loan:
- Loan amount (the amount that you wish to borrow)
- Loan term (example: 30 years, 20 years, 15 years)
- Loan type (example: fixed rate, adjustable rate, interest only)
Interest Rates
The loan interest rate, which is the cost of borrowing money, can change daily due to fluctuating market conditions. With fixed-rate mortgage deals, you pay the same rate of interest for the life of the loan. With an adjustable-rate mortgage (also called variable-rate), the rate can change over the life of the loan, which means your monthly payments will change too.
To make comparison easier, 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 other required charges. It is expressed as a yearly rate that makes it easier to compare across different loans.
Points
Loan points (also called discount points) can be compared to paying interest on your loan in advance. Points are linked to the interest rate. The more points you pay at closing, the lower the interest rate you are offered, and the lower your monthly payments become. This is because you have already paid some of your loan interest up front.
Ask for points to be quoted to you as an actual dollar amount, instead of a number of points, so that you will know how much you actually need to pay.
Loan Fees
Loan fees can be the most confusing aspect of comparing mortgage deals, but try to take the time to understand each fee quoted. You want to compare deals and look for fees that might be negotiable. Don’t just accept the fees without question, as this is your best opportunity to a negotiate lower overall cost for your loan.
- Ask exactly what each fee includes. Several items might be lumped into one fee.
- Ask for an explanation of any fee you do not understand.
Down Payment and Private Mortgage Insurance (PMI)
If you are providing less than 20% down payment, the lender will normally require you to purchase private mortgage insurance (PMI). This insurance protects the lender in case you fail to repay the loan. PMI is very commonly required for borrowers seeking their very first mortgage. It is very costly, so try to avoid PMI if at all possible.
Be sure to ask about:
- Lender requirements for a down payment amount
- What you need to do to verify that your down payment funds are available
- Any special programs the lender may offer
If PMI is required for your loan, be sure to ask:
- What the total cost of the insurance will be over the life of the loan
- how much your monthly payment will be after including the PMI premium
- How long you will be required to carry PMI (you can drop it after a certain point)
Negotiate Terms
After you have collected and compared the necessary information from several quotes, it is time to start negotiating a deal. The cost of any given mortgage package might vary from day to day. That is because a quoted cost often contains a built-in overage, or extra compensation amount, that the loan officer or broker is allowed to keep.
Ask the loan officer or broker if they are willing to reduce or eliminate some of the quoted fees, or if they can reduce the interest rate or number of points. Make sure they are not reducing one fee while raising another (such as lowering the interest rate by raising points). This is where it really helps to obtain three or four quotes from different lenders, as you can ask one lender to match terms offered by another.
Lock In The Rate
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.
After you have arrived at the best deal you can, you might consider locking in the quoted interest rate. The lock-in will protect your quoted rate if interest rates climb later, while your loan is being processed. However, if rates fall instead, you might be stuck with your quoted interest rate, although some lock-in agreements allow you to go to the lower rate.
Be sure to obtain the following terms in writing:
- The amount of the lock-in fee, and whether or not it is refundable at closing.
- The length of the lock-in period
- What happens if rates fall during the lock-in period
Shop, Compare, Negotiate
Remember, when looking for the best mortgage deals, your plan is: Shop, Compare, and Negotiate. Even if you have credit problem and need to find a bad credit mortgage, the plan is still the same. Whether you have credit problems or not, it’s wise to review your credit report for accuracy and completeness before you even start the shopping process.
Be sure to take your Mortgage Worksheet with you and use it. Let the loan officer or broker know that you are a serious and informed buyer, and they will work that much harder to offer you the best mortgage deal they can.
Don’t be afraid to have lenders and brokers compete for your business!
Go back to Aspendance Realty home.
Mortgage Shopping Worksheet
| Lender 1 | Lender 2 | |||
| Name of Lender: | ||||
| Name of Contact: | ||||
| Date of Contact: | ||||
| Mortgage Amount: | ||||
| mortgage 1 | mortgage 2 | mortgage 1 | mortgage 2 | |
| Basic Information on the Loans Type of Mortgage: fixed rate, adjustable rate, conventional, FHA, other? If adjustable, see below |
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| Minimum down payment required | ||||
| Loan term (length of loan) | ||||
| Contract interest rate | ||||
| Annual percentage rate (APR) | ||||
| Points (may be called loan discount points) | ||||
| Monthly Private Mortgage Insurance (PMI) premiums | ||||
| How long must you keep PMI? | ||||
| Estimated monthly escrow for taxes and hazard insurance | ||||
| Estimated monthly payment (Principal, Interest, Taxes, Insurance, PMI) | ||||
| Fees Different institutions may have different names for some fees and may charge different fees. We have listed some typical fees you may see on loan documents. Application fee or Loan processing fee |
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| Origination fee or Underwriting fee | ||||
| Lender fee or Funding fee | ||||
| Appraisal fee | ||||
| Attorney fees | ||||
| Document preparation and recording fees | ||||
| Broker fees (may be quoted as points, origination fees, or interest rate add-on) | ||||
| Credit report fee | ||||
| Other fees | ||||
| Other Costs at Closing/Settlement Title search/Title insurance For lender |
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| Title search/Title insurance For you |
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| Estimated prepaid amounts for interest, taxes, hazard insurance, payments to escrow | ||||
| State and local taxes, stamp taxes, transfer taxes | ||||
| Flood determination | ||||
| Prepaid Private Mortgage Insurance (PMI) | ||||
| Surveys and home inspections | ||||
| Total Fees and Other Closing/Settlement Cost Estimates | ||||
| Lender 1 | Lender 2 | |||
| Name of Lender: | ||||
| mortgage 1 | mortgage 2 | mortgage 1 | mortgage 2 | |
| Other Questions and Considerations about the Loan Are any of the fees or costs waivable? |
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| Prepayment penalties Is there a prepayment penalty? |
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| If so, how much is it? | ||||
| How long does the penalty period last? (for example, 3 years? 5 years?) | ||||
| Are extra principal payments allowed? | ||||
| Lock-ins Is the lock-in agreement in writing? |
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| Is there a fee to lock-in? | ||||
| When does the lock-in occur—at application, approval, or another time? | ||||
| How long will the lock-in last? | ||||
| If the rate drops before closing, can you lock-in at a lower rate? | ||||
| If the loan is an adjustable rate mortgage: What is the initial rate? |
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| What is the maximum the rate could be next year? | ||||
| What are the rate and payment caps each year and over the life of the loan? | ||||
| What is the frequency of rate change and of any changes to the monthly payment? | ||||
| What is the index that the lender will use? | ||||
| What margin will the lender add to the index? | ||||
| Credit life insurance Does the monthly amount quoted to you include a charge for credit life insurance? |
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| If so, does the lender require credit life insurance as a condition of the loan? | ||||
| How much does the credit life insurance cost? | ||||
| How much lower would your monthly payment be without the credit life insurance? | ||||
| If the lender does not require credit life insurance, and you still want to buy it, what rates can you get from other insurance providers? | ||||