Whether you’re in the process of buying a house or refinancing, the mortgage you select for your property will play a significant role in how much the property ends up costing you. Do you know how to shop around and compare mortgages?
Which Factors to Consider
As a general rule of thumb, you should get quotes from at least three different lenders. You’re welcome to reach out to more, but at some point, all of the options become overwhelming and you’ll experience more confusion than clarity. Three is a good number. It gives you options while still allowing for some focused analysis.
As you compare loans and shop for the perfect mortgage, keep these factors at the forefront:
1. Interest Rate
The interest rate is a fairly straightforward data point. Lenders will offer you a certain interest rate based on the national average, your credit score, and other factors related to your loan application.
“The interest rate is arguably the most important thing in a home loan, as a lower interest rate can save you thousands (tens of thousands even) of dollars over the course of the mortgage,” Savings.com.au explains. “While getting the lowest home loan interest rate you can is important, it isn’t the be-all-end-all, as it’s very possible a mortgage with a slightly higher interest rate might be more suitable to your needs.”
While most mortgage providers are going to present you with the best interest rate they can, there may be room to negotiate. The further the rate is from the national average, the more room there is to potentially get a better deal.
2. Loan Type
There are four types of institutional mortgage loans: VA loans, FHA loans, conventional loans, and jumbo mortgages. Begin your search by understanding which of these types of loans you qualify for and the associated benefits and drawbacks of each. (The majority of homebuyers fall into either FHA or conventional.)
Fees are one of the primary reasons why you don’t automatically take the mortgage with the lowest interest rate. Depending on the difference between the rates and the fees the lender is tacking on, it could be that the loan with the higher rate is actually more cost-effective.
“A home loan often involves many fees, such as loan origination or underwriting fees, broker fees, and settlement (or closing costs),” the FTC mentions. “Every lender or broker should be able to give you an estimate of its fees. Many of these fees are negotiable.”
Certain fees will be paid upon applying for a loan, some are paid at closing, and others can actually be rolled into the loan amount. Get clear on which fees get tacked on where so that you can compare them appropriately.
4. Repayment Terms
There are two major types of mortgage repayment structures: fixed-rate mortgages and adjustable rate mortgages. With a fixed-rate loan, the interest rate stays the same over the life of the loan. With an adjustable rate, it’ll hold steady for a few years (usually five to seven years) and can then creep up over time. The rate on an adjustable rate mortgage is typically lower on the front end, but can cost more over the long run.-
Choosing the Right Home Loan Product
With so many different factors, it can be confusing to figure out which loan is the best for your circumstances. The Loan Estimate worksheet attempts to simplify this by allowing you to compare apples to apples.
“The Loan Estimate is a three-page document that lists your loan amount, quoted interest rate, fees and all other costs associated with the loan,” Bankrate.com explains. “Comparing Loan Estimates can help determine which offer is more cost-effective.”
The nice thing about the Loan Estimate is that every lender is required to use the exact same form. This allows you to quickly compare all loans without having to fish around for different numbers hidden in different places.
“Every lender is legally required to provide you with a Loan Estimate within three days of getting your application and pulling your credit report,” Bankrate.com continues. “The costs listed on the Loan Estimate generally don’t change any time in the mortgage process.”
When reviewing the Loan Estimate, meticulously read every word and make sure you understand each number. If there are any unfamiliar terms included on the worksheet, you should inquire about them. This includes fees related to balloon payments, prepayment penalties, homeowners insurance premiums, and estimated cash to close.
The more thorough you are, the more likely it is that you’ll end up with a loan that’s cost-effective and appropriate for your family’s needs.