A mortgage - whether it’s a home purchase, a refinancing, or a home equity loan - is a product, just like a car. This means that the price and terms may be negotiable. Shopping and searching around for the best and most suitable home loan or mortgage will help you find the best financing deal. You’ll want to compare all the costs involved in obtaining a mortgage. This excercise can save you thousands of dollars.
Contact several lenders
Thrift institutions, commercial banks, mortgage companies, and credit unions are some types of lenders that give home loans. Contact different lenders to make sure you're getting the best price in your situation.
You can also get a home loan through a mortgage broker. Mortgage brokers will find a lender for you i.e. they will arrange transactions rather than directly lending you the money. This may be more advantageous because a broker has access to several lenders and has market knowledge, therefore you can end up choosing from a wider selection of loan products and terms. You should consider contacting more than one broker, just as you should with banks or thrift institutions.
One thing to keep in mind is that the distinction between a financial institution and a broker is not always clear because 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 is important because brokers or agents are usually paid a fee for the services that they offer, which may be separate (in addition to) other fees that the lender charges. 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. That is why it is important to always make sure how your broker will be compensated so that you can compare the different fees involved. Be prepared to negotiate with the brokers as well as the lenders.
Obtain all cost information
You should have an estimate of the down payment that you would like to make or at least have an idea of the monthly payment that you can afford. 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.
Use this worksheet to keep track of all costs so it becomes easier to compare the lenders and the various mortgage options.
The following information is important to get from each lender and broker:
RATES
- Obtain a list of its current mortgage interest rates from each lender and broker.
- Is 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 it is an adjustable-rate loan, find out how your rate and loan payment will vary. Specifically find out if your loan payment will be reduced when rates go down.
- Find out what the loan’s annual percentage rate (APR) is. (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. Read more)
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. "No cost" loans are sometimes available, but usually at a higher rate.
- Find out what each fee includes (more than one item may be lumped into one fee)
- Find out what each fee is, and ask for an explanation of any fee you do not understand.
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 - this can vary from lender to lender. 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.
- Find out about the lender’s requirements for a down payment. Also ask what you will need to do in order to verify that you have the funds for your down payment.
- Ask your lender about any special programs it may offer.
If PMI is required for your loan,
- Find out the total cost of the insurance.
- Find out the monthly payment including the PMI premium.
- Find out how long you will be required to carry the PMI.
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.
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 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.