Comparing mortgage terms is the smartest thing you can do when shopping for a loan. At first glance, you might think you can tell which lender offers the best deal. It probably takes a little more probing before you figure out the right answer, though. Here are some tips on to compare the right way.
Get on Even Playing Ground
First, you need offers that are similar in order to compare them. For example, comparing an adjustable rate loan to a fixed rate loan won’t be accurate. You need loans with similar terms in order to get a fair answer.
Once you know the type of loan you want, ask several lenders for a quote on this loan type. For example, let’s say you want a 30-year fixed rate loan with no points. You can let each lender you apply with know what you want. They can then provide you a quote based on the terms you desire. This doesn’t mean you can’t get quotes for other programs. But, you will have a basic idea of which loan is better when they are all the same. If you want to alter things from there, you can do so, but know you can’t compare programs that aren’t the same.
Ask for Loan Estimates
Once you know the type of loan you want, ask lenders for a Loan Estimate for this type of loan. It’s best to do this after providing proof of your qualifying factors. Provide the lender with your actual income, assets, and debts. Let them pull your credit report as well. This way they can tell what you qualify for and can provide a pre-approval rather than a generic prequalification.
Keep these items the same:
- Loan term – 15, 20, 25 ,or 30 years
- Rate type – Fixed or adjustable rate
- Loan-to-value ratio – The amount you must borrow compared to the value of the home
- Rate lock – The time you will lock in the rate before you close
- Points – The fees you may pay to secure a specific rate
If you secure Loan Estimates with identical factors from above, you can then easily compare offers.
Break Down the Fees
Make sure you break down the fees lenders charge. Some lenders may try to give you a lump sum total. This won’t help you compare offers, though. You need a breakdown of what they charge. A few of the common charges include:
- Origination fee
- Discount points
- Credit report
- Title search
- Title insurance
- Closing fee
- Escrow fee
- Tax service
Every lender can have their own fees, though. Some are negotiable, while others aren’t. Knowing the cost of each fee can help you decide how to proceed, though. Also, ask lenders which fees they include in their APR. You’ll need this number later.
For example, if one lender says closing costs total $5,000, but don’t break them down, you won’t know what you are paying for. Another lender may break the fees down. Let’s say they charge $400 for underwriting, 2 discount points, and $3,000 for title fees. You may not be able to negotiate underwriting or title fees, but the discount points definitely have wiggle room. You can ask the lender what the rate looks like without any fees or with just one point, for starters. This gives you a way to figure out how you want to proceed.
A No Closing Cost Mortgage is Different
If a lender offers a no closing cost mortgage, be careful. Yes, it may be a great deal, but don’t jump on it over other offers right away. You can’t compare a no closing cost mortgage and one with closing costs. The rates won’t be the same. In this case, looking at the APR may help. The APR is the actual cost of the loan with many fees included. Since you don’t have any closing costs with the first loan, the APR equals the interest rate. The loan with closing costs, though, has an APR. You may find the APR on that loan is lower. It depends on the amount of the closing costs. While it might seem favorable not to pay closing any closing costs, it could cost you more in the end.
Get Several Quotes
No matter how you proceed, make sure you secure quotes from several lenders. This way you can get an idea of what the norm is for the area. One lender may charge higher fees than another because they have less capital. One loan defaulted could put them in dire straits. Another lender may have a higher threshold for risk and won’t need to charge as much. Knowing what is available out there can help you decide what is right, though.
The bottom line is only you know which loan suits you the best. Take a close look at the long-term implications of the loan. How long do you see yourself keeping the loan? This should play a role too. If you don’t see yourself in the home for the long-term, you may not want to pay high closing costs. If you aren’t in the home long enough to recoup the costs, it doesn’t make sense.
On the other hand, if this is your “forever” home, it may be a good idea to pay the fees. This way you get the lower interest rate. Once you pay the closing costs off with the savings from the lower rate, you can enjoy monthly savings for the remainder of the term.
The best way to figure out which loan suits you the best is to talk with several lenders. Also consult with your tax professional. See how each loan will affect your tax liability. You may be surprised to see which items you can deduct on your taxes. This may further your savings and influence your decision. Take your time when deciding as a mortgage is a very important and expensive decision!