Comparison Shopping Tips

Shop Around

Shop around. Call several different lenders to learn about deals available in your area, then take it a step further and ask for reductions in rates a fees that aren't competitive. For instance, you can negotiate closing costs, appraisals, lawyers' fees, application fees, and loan points. None of these rates are set in stone.

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40 year Mortgages

Time-frame-Beware of 40 year mortgages that require smaller monthly payments than the conventional 30 year mortgages. You'll usually pay tens of thousands more in interest during those 10 extra years.

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Which loan to choose

To decide on whether to pay loan points and fees or to choose a no-points, no-cost loan follow the following steps: 1) Figure out your monthly payment with a loan with points and fees. 2) Figure out your monthly payment with a no-point, no-fee loan. 3) Subtract line 1 from line 2. 4)Enter the cost of points and fees. 5)Divide line 4 by the results of line 3 to figure the number of months it would take to recoup your up-front costs. If you expect to own your home for a year longer than the number of months figured in line 5, then you should pay points (and fees) to get a lower interest rate. Otherwise, choose a no-points or no-cost loan.

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No Points/No Closing Cost Loan vs. Lower Rate Loan

The best choice for you depends on your circumstances and future plans. It also depends on whether you are purchasing or refinancing your home. What factors are important to consider?

• How long do you plan to keep this mortgage loan?
• If you are purchasing, how much money do you have for the down payment and closing costs?
• How strong or weak is your credit?
• If you are refinancing, how much equity do you have in the home, which determines how much cash you can receive at the closing?

• How much higher is the fixed rate or the start rate, index and margin if you choose a no points/no closing cost (NP/NCC) loan versus a lower interest rate loan? If you are going to keep the home and mortgage for a long period, you are almost always better off if you take the lowest interest rate available.
• How much actual cash will you save by choosing an NP/NCC loan versus a lower rate loan? If you are lacking sufficient down payment and closing cost funds or sufficient equity to generate these funds in a refinance, the comparison may be easy. But if you have these funds and/or equity but are considering the cash savings you might enjoy, the question becomes “What are you going to do with the cash saved?” Are you going to save it for a “rainy day” or invest it somewhere? How much can you earn if you invest this money? Or how much is it worth to have the “security” of having more liquid cash than you would if you chose a lower rate loan? Excess cash that is just “sitting around” can be a very expensive asset but if it makes you more comfortable to have it, then choose the lowest closing cost option.

The bottom line, as always, remains: The longer you plan to own the property or at least keep this mortgage loan, the more sense it makes to take the lowest interest rate you can get. Period.

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Who Do You Trust?

One of the biggest and most costly mistakes mortgage shoppers often make is choosing a lender because they have the lowest rate and then not getting the offer in writing or examining a Good Faith Estimate (GFE). First, pay closer attention to points, discount and origination fees, the true Annual Percentage Rate (APR), and all other closing related fees. But, of equal importance, is getting referrals from friends, family, and co-workers. You absolutely must trust and be comfortable with whomever you select to handle your mortgage request for you. If you find a source with a great interest rate but one that unsettles you with his/her apparent lack of knowledge, professionalism, outward concern for your welfare, or any other questionable behavior, you should compare both rate and source to another that might have slightly less attractive terms but who instills confidence in you. Data proves that this second choice will normally make for a better, less stressful mortgage loan experience. Ask questions and do not be satisfied with answers that are inappropriate or confusing. Compare the people and companies you are dealing with as well as the loan terms they offer.

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Compare Short Term vs. Long Term Cost

The true cost of a mortgage loan can be a complex, but always critical, component of the entire process. Becoming a smart shopper can save you thousands of dollars in both the short- and long-term, while not asking the right questions can cost you a great deal of money.

Short-term expenses are primarily related to closing costs, the amount of money you will pay to close your mortgage loan. Many of these fees are almost identical regardless of which mortgage lender you select. Costs such as recording fees, flood certification, surveys, tax service fees, and other municipal or standard closing fees are very similar in most cases. Others, however, can vary widely depending on your origination source or actual mortgage lender. Points, loan discount and origination fees, legal closing fees, title insurance, and “junk fees” (underwriting, processing, warehouse, and document prep fees) can easily amount to short-term costs in thousands of dollars. Compare, compare, and compare all of these completely! Do not hesitate to question any of these short-term costs.

Long-term costs primarily involve your stated interest rate. If you are considering a fixed rate loan, this comparison is relatively simple. The stated rate is the one that will be charged throughout the life of the loan, be it three, five or twenty-five years. You should still compare the federal Truth-In-Lending (TIL) statement you will receive right after application – or, better, ask for one before you make application – to compare fixed rate loans. If your stated rate is six percent and you notice one TIL showing an effective rate of 6.115% versus another that shows 6.258%, you will be forewarned that one loan carries considerably higher short-term (closing costs) expenses than the other.

If you are considering an Adjustable Rate Mortgage (ARM), a TIL is absolutely critical. Your starting rate, while important, is not the most critical component of this type of loan. The most important long-term factor is the projected cost over the life of the loan. ARM's have items you need to compare in an “apples-to-apples” situation. These items are –

• Index – the published “base” rate used to calculate future rate changes;
• Margin – the percentage that will be added to the index at rate change date to result in your new rate;
• Adjustment Rate Cap – the maximum your rate can increase at each rate change date; and
• Lifetime Cap – the maximum your rate can increase (from your start rate) over the life of your loan.

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Points Charged or Earned by Your Mortgage Source

Points charged for a mortgage loan are always a sensitive issue, as they should be. The true cost of your loan will increase as the points increase. Since one point equals 1 percent of your mortgage amount, the larger the mortgage you want, the larger the cost will be. Be aware that different mortgage sources might quote this fee as points, loan discount fee, or loan origination fees. But these fees are really the same item stated differently. For instance, if your mortgage source tells you that this loan will cost one point and a one per cent loan discount fee, he/she is saying there are two points to be charged for this mortgage. Unless you are in a “high risk” category, the more points attached to your loan should translate to a lower rate for every point or portion of a point you pay.

There is another related factor that you should investigate. Many mortgage lenders will pay a mortgage source one or more points directly at closing if the originator delivers the mortgage at a rate slightly higher than the minimum rate the lender requires. While this is not a fee that will come directly from your funds, it is technically a cost to you. If your mortgage originator is earning one or more points “on the back end” of your loan, it means that you could have received a slightly lower rate than the one you will pay. Hence, over the term of the loan, you will pay more interest than you would have if your loan was delivered at the lender's minimum acceptable rate.

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Mortgage Shopping Techniques

The stated interest rate of a loan is only one factor you should consider. When shopping, ask every potential source what the closing costs might be if you selected the product they offer. Find out what the cost is for each item (title search, closing, underwriting, processing fees, etc.) Find out what the points are for this loan, including whether the lender is to receive points “on the back end”, which are sometimes given by the end lender at closing.

If your prospective lender is to receive another one to two points at closing, you are paying a higher interest rate than you need to. The mortgage broker or company is “delivering” your loan to the end lender at a higher than market rate so you are really eligible for a lower interest rate. Ask for it. Ask your prospective source how long the rate quoted is “locked”. Locks come in a variety of flavors, e.g. 0, 10, 30, 60 days, etc. A rate without a lock could be useless, since it could change in the next hour. A 10 day rate is almost equally useless since your loan won't get closed in that time period. Should you have a 30 day lock, ask the lender to guarantee that you will close in one month or that they will hold the rate or give you a lower one, should the rate decrease. A 60 day lock is one you can rely on, but get written proof from your lender that your rate is indeed locked for that time period.

Finally, do your homework. If you're thinking of dealing with a lending source you do not know, find out what reputation they have in the industry. This is too important a decision to risk dealing with a source that has a less than stellar reputation

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Fixed Rate vs. Adjustable Rate

If you live in the northeast, you probably favor Fixed Rate mortgages. Should you live on the “left coast”, you may be more inclined to look for an Adjustable Rate Mortgage (ARM). If your address is in the Midwest, you are probably open to compare either, without prejudice toward one or the other. There is no one right answer.

For those who value “security” above all else, a fixed rate mortgage is the perfect answer since the rate will not change for the life of the loan, normally 30 years. If you want to save as much money as possible and are not afraid of a little risk, an ARM may be the best answer. Should you plan to own the home securing the mortgage for a relatively short time (three to eight years), an ARM probably is the best choice. However, should you plan on keeping the property (or at least the mortgage) for the long term, a fixed rate might be better (and safer) for you.

If you need to qualify for a higher mortgage than you can get with a fixed rate, you may need to use an ARM to be approved for a larger amount. In any case, always compare the Annual Percentage Rates (APR's) of all of your choices to know which selection is the best option for you .

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Interest Rate Comparisons

Pure fixed rate comparisons are easy. A fixed rate of 6.5% will cost more than a 6.125% loan each year and over the life of the loan. But to properly compare effective rates, use the Annual Percentage Rate (APR) which considers all closing costs for a particular loan and will be shown in the federal Truth In Lending (TIL) statement required to be given to you within 72 hours of you submitting an application. Unlike most other installment loans, the stated rate of a mortgage is also its true rate. However, closing costs can affect the effective rate you will pay. Therefore, for a real comparison, you must include the closing costs as a factor in the true interest rate for the loan. You must look closely at the APR for an ARM as the effective rate can be very different from the start rate, depending on the frequency of rate adjustments, the index and margin, and the adjustment and lifetime caps on the loan.

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How to Compare Closing Costs

Do not confuse closing costs with required escrow amounts. People sometimes do this and make incorrect assumptions about the “cost” of closing a mortgage loan. Closing costs are those items that are true expenses of closing the loan, while escrows (often two months property taxes and two months homeowners insurance premiums) are monies that would be spent anyway to pay for taxes and insurance. They are not additional costs to close the loan (although you will need funds to satisfy this requirement). The most common closing costs to compare:

• Origination fee (Points)
• Loan discount fee (Points)
• Appraisal fee
• Application fee, if any
• Title examination fee
• Title insurance
• Closing attorney or escrow company fee
• Recording fee
• Survey fee
• Flood certification fee
• Home and/or pest inspection
• Tax service fee
• Wire transfer fee
• Postage – usually overnight delivery charges
• Underwriting fee (“junk fee”)
• Processing fee (“junk fee”)
• Funding fee (“junk fee”)

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How to Compare Purchase Mortgages

First, have a game plan for yourself. Ask yourself some questions. How long do you plan to keep this house? How do you feel about your income security and future income? How much down payment and closing cost cash will you have? If you want a fixed rate loan, compare rates and closing costs of different choices.

If you are leaning towards an Adjustable Rate Mortgage (ARM), concentrate on adjustment caps, lifetime cap, the index used (the base rate) plus the margin (the amount added to the index to determine your rate). Do not just be concerned about the start rate on 6 month, 1 year or 2 year ARM's. The index, margin, adjustment and lifetime caps are equally important. If this property is merely a “stepping stone” that you will keep for four to five years, an ARM may be a better choice since you won't care what the rate is 14, 21, or 23 years from now.

Compare closing costs vs. rate carefully. A loan with very low closing costs but a higher rate will cost you a lot more if you keep this mortgage more than a few years depending on the contract rate. The Annual Percentage Rate (APR) is the critical number to compare. This shows the true cost of a mortgage to you over the life of the mortgage, including the closing cost factor and the effect of rate changes if you're analyzing an ARM.

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