Talking to multiple loan officers might not be much fun, but it is definitely a good idea to shop around for your mortgage. There are often huge differences in closing costs, interest rates and terms between lenders. All loan officers should give you a Good Faith Estimate of closing costs that spell out rates and fees, but it is still often not easy to compare them. At the end of this article, I am including a standardized quote sheet to help you interpret the Good Faith Estimate to determine who is offering the best deal.
The goal with comparing offers is to be able to boil each mortgage quote down to the essentials of interest rates, lender charged closing costs, loan terms and your projected monthly loan payment.
Rates get all of the attention when comparing offers despite the fact that a rate quote is absolutely meaningless without knowing how much that rate is going to cost you at closing.
Interest rates can be bought down with either points or other fees associated with the closing. Essentially, by paying more money up front you can lower the rate of the loan. This choice to buy down your interest rate should be up to you - therefore, if you receive a quote with a low rate and high fees, ask the loan officer what your rate would be without the fees!
When a loan officer quotes an APR it is often an honest attempt to show you the true cost of a particular mortgage program expressed as a percentage. Your interest rate on the loan may be 6.25%, but since your APR includes projected closing costs in the percentage figure, it may come out to 6.77%. 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 the best way to compare mortgage quotes.
In order for APR's to be of any value to consumers, they need to be a standardized measure of mortgage quotes. Unfortunately, the government allows different mortgage companies to use their own methods of 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.
To be fair, the reason the government allows different calculation methods boils down to the complexity of the math itself. But to me, this is a red flag. If calculating APR's is so complex that it ends up being different between companies, I think it's a virtually worthless number. Even worse, I believe because of the complexity involved, APR's are open to manipulation.
The good news is that there is an easier, more straightforward way to compare quotes - so read on.
The Good Faith Estimate your loan officer should give you with her quote often includes more fees, for more services than seem reasonable. The truth is that there are a lot of jobs to be done during the mortgage process and wherever money is spent, it must be reported.
With that said, there are certain fees which are completely tied to your loan officer and the mortgage company.
The easy way to distinguish between a lender charged closing cost and a third party fee is to ask where the money goes. An appraisal fee goes to the appraiser. A credit report fee goes to the company that processes those reports. Underwriting fees, admin fees, processing fees, origination fees, tax service fees and document prep fees are all examples of charges that go directly to the mortgage company. Ask your loan officer where each fee goes to determine which ones are lender fees and which are for third party services. Since lenders can really only determine their own fees, you can assume that third party charges will remain the same no matter where you go for your loan.
If a loan officer cannot adequately explain which of the quoted fees go to the lender, you can safely eliminate that person from your list.
Comparing apples to apples is key when looking at mortgage quotes. An adjustable rate mortgage is going to have a lower rate than a 30-Year fixed rate mortgage. A 30-Year fixed rate mortgage with a prepayment penalty is going to have a lower rate than a 30-Year fixed rate mortgage without one of those traps. Make sure your loan officer specifies exactly what program he is quoting! Always ask if there is a prepayment penalty, if you are required to pay mortgage insurance and if the program is a balloon loan.
Sometimes different lenders will not make comparing apples to apples easy with the loan program they quote. This often comes up whenever you put less than 20% down. For instance, if you are planning to put 10% down on your home purchase, some lenders will quote a single loan - this loan may require you to pay monthly mortgage insurance premiums, or these premiums may be included in your interest rate.
Other lenders will offer what's often called an 80-10-10. This means they are offering one loan at 80% of the purchase price and a second loan at 10% of the price. So without getting too complicated, how can you compare an 80-10-10 to a single 90% loan?
Have your lender simply calculate the total monthly loan payment - including mortgage insurance if the lender requires it. This way, without even looking at the interest rates you can determine which program will cost you less per month.
I wanted to go over all that background so this chart will make the most sense. You don't have to have the loan officer fill it out - you can get most of the information from the Good Faith Estimate. You should be able to check with the loan officer if there are details you can't figure out on your own.
Once you have the charts filled out for each loan offer, comparison should be simple. First make sure you are comparing the same programs between lenders. Don't compare a 5-Year ARM to a 30-Year fixed rate loan.
Assuming you are comparing apples to apples, whoever is offering the lowest rate, with the lowest fees for the lowest monthly payment has given you the best deal.
If loan officer A has a lower rate than loan officer B, but loan officer A has higher fees, ask her what her rate would be with the lower fees of loan officer B. If her rate is still lower, then your choice is clear.
Look out for red flags too. Each loan officer should give you all of the information you need to make an informed choice. If they inquire about other offers you've received, tell them you simply want their best offer - that shouldn't be dependant on the competition!
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!
Contact me anytime to receive my best offer for financing.
