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Shopping 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.
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 in this brochure.
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 that follows 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,
contact:
Equifax: (800) 685-1111
TransUnion: (800) 916-8800
Experian: (888) EXPERIAN (397-3742)
Glossary
Adjustable-rate loans, also known as variable-rate loans, usually offer a lower initial interest rate
than fixed-rate loans. The interest rate fluctuates over the life of the loan based on market conditions, but the
loan agreement generally sets maximum and minimum rates. When interest rates rise, generally so do your loan payments;
and when interest rates fall, your monthly payments may be lowered
Annual percentage rate (APR) is the cost of credit expressed as a yearly rate. The APR includes the
interest rate, points, broker fees, and certain other credit charges that the borrower is required to pay.
Conventional loans are mortgage loans other than those insured or guaranteed by a government agency
such as the FHA (Federal Housing Administration), the VA (Veterans Administration), or the Rural Development Services
(formerly know as Farmers Home Administration, or FmHA).
Escrow
is the holding of money or documents by a neutral third party prior to closing. It can also be an account held
by the lender (or servicer) into which a homeowner pays money for taxes and insurance.
Fixed-rate loans generally have repayment terms of 15, 20, or 30 years. Both the interest rate
and the monthly payments (for principal and interest) stay the same during the life of the loan.
The interest
rate is the cost of borrowing money expressed as a percentage
rate. Interest rates can change because of market conditions.
Loan origination fees are fees charged by the lender for processing the loan and are often expressed
as a percentage of the loan amount.
Lock-in
refers to a written agreement guaranteeing a home buyer a specific interest rate on a home loan provided that the
loan is closed within a certain period of time, such as 60 or 90 days. Often the agreement also specifies the number
of points to be paid at closing.
A mortgage is a document signed by a borrower when a home loan is made that gives the lender
a right to take possession of the property if the borrower fails to pay off on the loan.
Overages
are the difference between the lowest available price and any higher price that the home buyer agrees to pay for
the loan. Loan officers and brokers are often allowed to keep some or all of this difference as extra compensation.
Points
are fees paid to the lender for the loan. One point equals 1 percent of the loan amount. Points are usually paid
in cash at closing. In some cases, the money needed to pay points can be borrowed, but doing so will increase the
loan amount and the total costs.
Private mortgage insurance (PMI) protects the lender against a loss if a borrower defaults on the loan.
It is usually required for loans in which the down payment is less than 20 percent of the sales price or, in a
refinancing, when the amount financed is greater than 80 percent of the appraised value.
Thrift institution is a general term for savings banks and savings and loan associations.
Transaction,
settlement, or closing costs may include application fees; title
examination, abstract of title, title insurance, and property survey fees; fees for preparing deeds, mortgages,
and settlement documents; attorneys' fees; recording fees; and notary, appraisal, and credit report fees. Under
the Real Estate Settlement Procedures Act, the borrower receives a good faith estimate of closing costs at the
time of application or within three days of application. The good faith estimate lists each expected cost either
as an amount or a range.
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Mortgage
Shopping Worksheet
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Lender 1
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Lender 2
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| Name of Lender |
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| Name of Contact |
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| Date of Contact |
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| Mortgage Amount |
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| Basic Information on the Loans |
Mortgage 1
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Mortgage 2
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Mortgage 1
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Mortgage 2
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| Type of Mortgage: Fixed rate, adjustable rate, conventional, FHA, other?
If adjustable, see below. |
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| Minimum down payment required |
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| Loan term (length of loan) |
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| Contract interest rate |
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| Annual percentage rate (APR) |
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| Points (may be called loan discount points) |
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| Monthly Private Mortgage Insurance (PMI) premiums |
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| How long must you keep PMI? |
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| Estimated monthly escrow for taxes and hazard insurance |
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Estimated monthly payment
(Principal, Interest, Taxes, Insurance, PMI) |
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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. |
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| Application fee or Loan processing fee |
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| Origination fee or Underwriting fee |
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| Lender fee or Funding fee |
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| Appraisal fee |
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| Attorney fees |
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| Document preparation and recording fees |
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| Broker fees (may be quoted as points, origination fees, or interest rate
add-on) |
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| Credit report fee |
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| Other fees |
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| Other Costs at Closing/Settlement |
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Title search/Title Insurance
For lender
For you |
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| Estimate prepaid amounts for interest, taxes, hazard insurance, payments
to escrow |
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| State and local taxes, stamp taxes, transfer taxes |
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| Flood determination |
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| Prepaid Private Mortgage Insurance (PMI) |
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| Surveys and home inspections |
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| Total Fees and Other Closing/Settlement Cost Estimates |
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Mortgage Shopping
Worksheet - continued
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Lender 1
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Lender 2
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| Name of Lender |
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| Other Questions and Considerations about the Loan |
Mortgage 1
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Mortgage 2
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Mortgage 1
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Mortgage 2
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| Are any of the fees or costs waivable? |
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| Prepayment penalties |
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| Is there a prepayment penalty? |
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| If so, how much is it? |
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| How long does the penalty period last? (for example, 3 years? 5 years?) |
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| Are extra principal payments allowed? |
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| Lock-ins |
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| Is the lock-in agreement in writing? |
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| Is there a fee to lock-in? |
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| When does the lock-in occur -0 at application, approval or another time? |
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| How long will the lock-in last? |
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| If the rate drops before closing, can you lock-in at a lower rate? |
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| If the loan is an adjustable rate mortgage: |
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| What is the initial rate? |
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| What is the maximum the rate could be next year? |
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| What are the rate and payment caps each year and over the life of the loan? |
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| What is the frequency of rate change and of any changes to the monthly payment? |
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| What is the index that the lender will use? |
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| What margin will the lender add to the index? |
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| Credit life insurance |
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| Does the monthly amount quoted to you include a charge for credit life insurance? |
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| If so, does the lender required credit life insurance as a condition of
the loan? |
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| How much does the credit life insurance cost? |
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| How much lower would your monthly payment be without the credit life insurance? |
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| 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? |
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