| Topic - Finding the Best Mortgage | Education Center |
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. Compare all the costs involved in getting a mortgage -- shopping around may save you thousands of dollars.
Talk to Several Lenders
Mortgages 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 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 loans and terms to choose from. 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're 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 Cost Information
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. Get the following informationfrom each lender or broker:
Rates. Get a list of current rates. Make sure it indicates whether the rates are fixed or adjustable. Find out the annual percentage rate (APR). (The APR takes into account not only the interest rate but also points, broker fees, and any other loan charges you have to required to pay, expressed as a yearly rate).
Points. Points are fees paid to the lender or broker and are often linked to the interest rate. Usually, the more points you pay, the lower the rate. 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 mortgage usually involves many fees, such 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.
Down payments. 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 five percent on conventional loans.
Private mortgage insurance (PMI). If a 20 percent down payment is not made, lenders usually require the homebuyer to purchase private mortgage insurance to protect the lender in case the homebuyer fails to pay. If PMI is required for your loan, ask what the total cost of the insurance will be, how much your monthly payment will be when including the PMI premium, and how long you'll have to carry PMI.
Negotiate the Best Deal
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 they 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.