Reader question: How can I find the best mortgage loan?
I answered this question several years ago, but it bears repeating. Comparing the cost of mortgage loans is a challenge for most mortgage shoppers. Do this before you look for your home. The most helpful lender may also have the best preapproval letter. Here are 10 facts to help you find the right loan:
1. Interest rates change daily - Lenders calculate interest rates on indexes such as the prime lending rate or LIBOR. These rates move up and down daily.
2. Annual percentage rate (APR) calculations are not accurate - The formula for calculations assumes the entire term of the amortization. If amortization is 30 years and you relocate in three years, the actual APR is more significant than stated by the lender.
3. The type of loans must be the same when making comparisons - Compare two fixed-rate mortgages, not a fixed-rate and an adjustable-rate mortgage (ARM).
4. The APR calculation includes private mortgage insurance (PMI) - When there is less than a 20% down payment on the home.
5. No lender has the best rate and terms at all times - Lenders source of funds are continually circulating, and pricing changes often. Lenders commit to a funding source to invest a specific volume at a particular rate. Once they place those funds, prices change. Check out rate-match guarantees.
6. There are different types of mortgage lenders - Commercial banks, thrift institutions, credit unions, mortgage brokers, online lenders and more. All must follow the HUD rules, but they all operate differently. They may or may not honor any fiduciary relationship with you.
7. Fixed-rate, adjustable-rate, balloon mortgages, and government-assisted VA and FHA loans are typical. Specialty products for rural loans, certain local neighborhoods and more exist.
8. The interest rate and monthly payments are not the whole story. Various closing costs can impact your out-of-pocket fees or monthly payment significantly. Always ask for dollar amounts and not percentages when gathering all the expenses.
9. Other costs incurred may be added to a mortgage. If the debt to income ratio is good, many lenders will add closing costs to the mortgage loan.
10. Credit score issues impact quoted interest rates. A spotty payment history, excessive income-to-debt ratios, and other factors may mean a higher interest rate.
The preceding background material sets the stage for you to start shopping with a good overview of considerations in the process of identifying potential lenders and comparing their pricing and products.
Gathering the information to compare
Have a checklist to follow to ensure you have asked the right questions. Here is a printablearticle from the Federal Trade Commission of the questions to ask. Most loan originators appreciate a consumer asking these questions. Your questions are an indication you will be a good customer, so do not be shy. Ask away.
Now, negotiate from strength
Taking the time to understand and assemble this information provides you considerable negotiating power. Many lenders will negotiate. Now use this information to put those skills to work and save money.
Richard Montgomery is the author of “House Money - An Insider’s Secrets to Saving Thousands When You Buy or Sell a Home.” He is a real estate industry veteran who advocates industry reform and offers readers unbiased real estate advice. Find him at DearMonty.com.