Knowing and understanding all the mortgage options available to you could be the determining factor that moves you from wanting to buy a home to actually making the purchase a reality. When looking for a mortgage, the Federal Reserve Board advises consumers to shop, compare and negotiate.
The mortgage industry is a competitive market, so start the process by shopping around to learn who offers what products. This will help you identify the loan products that will work best for your particular financial situation. Obtain information from commercial banks, mortgage companies and credit unions. Mortgage brokers are another source for home loans that consumers should explore. Mortgage brokers arrange loan transactions rather than lending the money. In a sense they do the shopping for you by contacting several lenders on your behalf and presenting options to you. Note that mortgage brokers are not obligated to find the best deal for you unless they have contracted with you to work on your behalf.
Since lending institutions sometimes act as brokers too, consumers should always ask whether a broker is involved. This is an important question because brokers are typically paid for the service they provide which could add fees to the total cost of your loan. On the flipside, a mortgage broker’s professional contacts may yield a better deal than a consumer could find alone, resulting in overall savings that outweigh the cost associated with paying for the broker’s services.
To accurately compare mortgages, make a checklist of information you should obtain from each lender or broker. A wide variety of terms and fees usually contribute to the final cost of the loan, so it is not enough to simply know the amount of your monthly payment and the interest rate. Ask for the following information with each loan inquiry:
- What are the current interest rates and are the rates quoted the lowest for that day or week?
- Are the rates fixed or adjustable? When adjustable interest rates rise, so will your monthly payment.
- If the rate is adjustable, ask how the rate change will affect the amount of your payment.
- Ask for the annual percentage rate (APR). The APR includes points, broker fees, and other charges as a yearly rate.
- Points are fees paid to the lender or broker and are usually tied to the interest rate.
- Ask lenders and brokers to quote points as an actually dollar amount rather than a number to help make accurate comparison.
- Fees associated with a mortgage often include origination or underwriting fees, broker fees, and transaction, settlement and closing costs.
- Request an explanation of what each fee includes because some times lenders lump fees together.
- Many of these fees are negotiable.
- Some fees are paid at the time of loan application and others at closing.
- Down payments vary from loan to loan. Many lenders now offer loans that require less than the standard 20 percent for a conventional loan. Some may be as low as five percent for conventional loans.
- Loans backed by government programs such as the Federal Housing Administration (FHA), Veterans Administration (VA), or Rural Development Services require even lower down payments.
- Ask the amount of down payment required.
- Ask the lender to explain any down payment assistance programs for which you may be eligible.
Private mortgage insurance (PMI)
- When a borrower’s down payment is less than 20 percent of the loan value, lenders require the borrowers to purchase PMI as a safeguard to protect the lender for taking on the larger risk associated with this type of loan and the possibility that the borrower might fail to pay it.
- If PMI is required, ask what the total insurance premium will be.
- Ask what your total monthly payment will be once PMI is added.
Once you have shopped around and compared the rates available to you in your market, revisit lenders or brokers that seem to have the best offer. Review the costs associated with the loan with your potential lender or mortgage broker. Ask that they waive or reduce one or more of the fees, agree to a lower rate or fewer points or match the terms of a competitor.
Once you and your lender or broker arrive at an agreement, request a written lock-in of the terms of the agreement. The lender may charge a fee for this and the lock-in is usually limited to a certain period of time, but this small investment will help you in the long run as it will protect the terms that you negotiated while you are in the process of buying your home.
Source: The Federal Reserve Board