Hooray for the homebuyer that understands the importance of lining up financing before ever stepping foot into a house for sale or placing eyes on a real estate listing website.
It’s one thing to understand the steps to take in the home buying process and yet another to understand the whole “how does lending work?” question. Because it seems like such a mysterious process, most first-timers look for the lender with the lowest interest rate, sign on the dotted line and call it a day.
That is a huge mistake, and here’s why: there’s more to a loan than the interest rate and you must compare apples to apples to ensure you’re getting a good deal. Not all loan products are identical so it takes some serious comparison shopping to make sure you’re getting the best deal out there.
It starts with a comparison of the three most important parts of a mortgage loan.
Round up some lenders to compare
Your best source for contact information for at least one lender is the Kris Lindahl Team. We’re happy to refer you to some of the Twin Cities’ top lenders.
Check online sites for attractive rates and add those lenders to the list. If you’ll be using an FHA loan, you’ll need to shop among FHA’s approved lenders, which you can find here.
Don’t forget to put your local bank on the list, especially if you have a good working relationship with the manager. Finally, consider using the services of a mortgage broker. These men and women shop for loans that match your criteria and circumstances, from a variety of lenders.
The first thing you need to understand is that advertised rates don’t necessarily apply to the product you want to purchase.
For instance, today at BankRate.com you’ll find that the lowest annual percentage rate advertised is 2.96 percent, while the highest is 4.176 percent. Naturally that 2.96 percent is quite attractive. This rate, however, is for an adjustable rate mortgage and, you guessed it, the 4.176 interest rate is for a 30-year fixed. (Rates based on a 740 credit score).
Know how much – to the penny – that you’ll be putting down in cash for the home. Then, determine what kind of a mortgage rate you want: fixed rate or adjustable.
Finally, decide on a term for the loan: 30 years, 15 years, five years, etc. You may eventually change your mind on the last consideration after shopping around, but that’s ok.
Now, pick up the phone and make some calls. Ask the following questions:
- Request the lender’s current interest rates and find out whether these rates are the lowest for just that day or for the week and if the rates quoted are for adjustable or fixed mortgages.
- If you’re inquiring about adjustable rates, ask when the rate increases, how the payments vary and whether the payments will go down with a reduction in the interest rate.
- Ask for the loan’s annual percentage rate (APR). The APR represents not only the interest rate but includes fees, points and other charges. This is the figure you should be using when comparing loans.
Bank of America defines points as “fees paid to the lender at closing in exchange for a reduced interest rate.” One point equals one percent of the loan amount.
Ask the lender’s representative to translate the points quoted into a dollar amount. This makes it easier to determine exactly how much you’ll be paying for the loan and, thus, easier to compare it to other offers.
Costs of the loan listed vaguely as “fees” need to be itemized for you to compare one lender to another. Ask the loan representative to do that for you.
The Good Faith Estimate
Legally, the lender must provide you, within three days of applying for the loan, a Good Faith Estimate (GFE) of all fees that will be due at closing. This form is what you will use to compare lenders. If you notice any large discrepancies between lenders, call them and ask for clarification.
When you’ve chosen a lender, see if it will allow you to lock in the interest rate, especially if the Feds seem on the verge of raising them. There may be a cost involved, so find out what that is.
To pay less on your monthly house payment requires that you take this initial step – even before choosing the house you’ll eventually purchase.
Image: "Apple and Orange - they do not compare" by Michael Johnson - originally posted to Flickr as Apples & Oranges - They Don't Compare. Licensed under CC BY 2.0 via Wikimedia Commons -