Shopping around for a mortgage will help a consumer get the best financing deal.
A mortgage, whether it is a home purchase, refinancing or a home equity loan, is a product. And like any other product, say for example a car, the price and terms may be negotiable. Consumers need to compare all the costs involved in obtaining a mortgage. Thousands of dollars can be saved when a consumer shops, compares and negotiates.
Home loans are available from several types of lenders including thrift institutions, commercial banks, mortgage companies and credit unions. Different lenders may quote different prices, so the consumer should contact several lenders to make sure the best prices is being offered.
As a consumer, home loans are also available through a mortgage broker. They arrange the transactions rather than lending money directly. A broker's access to several lenders can mean a wider selection of loan products and terms from which the consumer can choose.
Some financial institutions operate as both lenders and brokers. Most broker advertisements do not use the word “broker” so make sure to ask whether a broker is involved.
Be sure to get information about mortgages from several lenders or brokers. Know how much of a down payment is affordable and find out all the costs involved in the loan. Knowing just the amount of the monthly payment or interest rate is not enough. Ask information about the same loan amount, loan term and type of loan.
The following information is important to get from each lender and broker:
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. Also ask whether the rate is fixed or adjustable. Keep in mind that when interest rates for adjustable-rates go up, generally so does the monthly payment. If the rate quoted is for an adjustable-rate loan, ask how the rate and loan payment will vary, including whether the loan payment will be reduced when rates go down. Ask about the 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 may be required to pay, expressed as a yearly rate.
Points are fees paid to the lender or broker for the loan and are often linked to the interest rate, usually the more points, the lower the rate. Ask for points to be quoted as dollar amounts to know the actual number to pay.
A home loan often involves many fees, like loan origination, broker fees and transaction, settlement and closing costs. Every lender or broker should be able to give an estimate of its fees. Many of the fees are negotiable. Some fees are paid during the application process and other fees are are paid in closing. In some cases, the consumer can borrow the money needed to pay fees.
Down Payments & 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 five 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, VA or Rural Development Services are available, the down payment can be substantially smaller.
Once the consumer knows what each lender has to offer, they should negotiate the best deal. 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.
Have the lender or broker write down all the costs associated with the loan. Once the best deal has been negotiated, obtain a written lock-in from the lender or broker. Lock-ins protect consumers rate increases while the loan is being processed.