Quick Answer:  In order to determine which lender is offering the best deal, you must consider both interest rates AND lender closing fees. The Good Faith Estimate used to be the standard way to compare quotes before making a formal application.  Due to new federal rules, lenders will now provide the Good Faith Estimate after the formal application is submitted therefore eliminating its use as a comparison tool.  Now, lenders will express their quotes in a variety of ways, but you must still be able to boil it down to lender fees and rate.

Approximate read time:  5 minutes

Comparing mortgage quotes is not as simple as it should be.  In a perfect world, mortgage companies would all have the same set of fees and you could simply go with the lender who offers the best rate.  However, closing fees can vary drastically between loan officers, which means that the person offering the lowest rate may in fact be making the worst offer.  

To complicate things further, I have noticed that some lenders seem to estimate third party charges, like title insurance and escrow account deposits, much lower than they are likely to be.  This makes their ‘bottom line’ artificially appear as favorable as possible.  By the end of this article, you will know how to spot these gimmicks and know definitively how to select the loan provider that is truly offering the best deal.

Your first step when speaking with a lender should be to obtain a Good Faith Estimate.  This document will display your projected monthly payment, given a particular interest rate, along with a full list of fees you can anticipate for your loan closing.  For proper comparison’s sake, make sure each lender uses the same numbers for your sales price (or property value on a refinance), real estate taxes, homeowner’s insurance and down payment (equity for a refinance).  Also make sure each lender is offering the same program.  If you haven’t decided on, say, an FHA loan versus a conventional loan, have one lender show you the differences between the two in order to make your decision.  

WARNING: DO NOT DO BUSINESS WITH ANYONE WHO WILL NOT FREELY OFFER A GOOD FAITH ESTIMATE.

With the estimates in hand, now begins the work of parsing out the sea of numbers and fee terms.  Your goal really is to identify the fees that go to the lender.  It is important to have an idea about all the other fees, but those fees will not vary regardless of the lender you choose.  

Even if one lender says you only need a certain amount deposited into your escrow account, the lender does not make that call.  Ultimately, there is a standard calculation that the loan closer must to use for each transaction.  No matter where you get your loan, it will end up exactly the same along with your costs for government recording, title services, appraisal, etc.

Figuring out which fees go to the lender is not always easy, so it pays to simply ask up front.  So you have an idea how to do it on your own, here are some common lender fees to know:

Origination, Discount Points, Underwriting, Tax Service (doesn’t that sound like a government charge?), Administrative, Processing and Document Prep.

Once you have each lender’s rate quote and their lender fees added up a true comparison can be made.  There are obvious cases where one lender is offering the lowest rate and the lowest fees, or maybe the same rate but lower fees, etc.  Things get a bit complicated when you have Lender A offering a rate of 5.0% and $1,200 in lender fees while Lender B is quoting 5.25% on the rate with only $600 in lender fees.  The best way to handle this situation is to ask Lender A what their rate would be if they lowered their lender fees to match Lender B.  Interest rates are on a sliding scale and are influenced by fees, so it is quite likely that when Lender A reduces their fee to $600, their rate jumps up.

Personally, I think it is best to offer what we call in the industry, ‘par pricing’.  When I prepare a Good Faith Estimate, I use the minimum possible lender fee and determine the interest rate from that.  If the client would like to pay more in fees to lower their rate (referred to as ‘buying down’ or ‘buying points’), I firmly believe that this should be a fully transparent and open process.  It seems deceptive to me that there are some loan officers which essentially offer artificially low interest rates along with higher than necessary fees.

Some of you who are particularly savvy to general finance may be wondering why I haven’t talked about APR.

The Annual Percentage Rate, or APR, is designed to show you the true cost of a particular mortgage program expressed as a percentage. Your interest rate on the loan may be 4.25%, but since your APR includes projected closing costs in the percentage figure equation, it may come out to 4.77%. While your loan officer is actually required by law to disclose your APR in the Truth-in-Lending Statement, I don't believe it is an accurate way to compare mortgage quotes.

In order for APR's to be of any value to consumers, they need to be a truly standardized measure of mortgage quotes. Unfortunately, APR takes into consideration third party fees like title service charges, which, as we’ve discussed, are going to ultimately be the same regardless of your lender.  However, for the APR calculation, one lender could estimate the title fees low specifically to manipulate the results of the APR calculation.  This means that when you receive an APR from Company A and another from Company B you have no assurance that you can make an accurate comparison.  

This is all not to mention the fact that you really should be able to compare rate to rate and fee to fee.

One final note on this topic - just because someone offers the lowest rate, the lowest fees and the lowest monthly payment does not mean they can follow through on that promise. Trust your instincts and only work with a mortgage professional you feel comfortable with. Pay attention to how easily they can answer your questions. If they are not particularly knowledgeable, they may be offering rates and fees they cannot live up to!