How do you know if you are getting the best deal on a first home mortgage? It is more than just the interest rate. Buyers also have to consider the lender fees associated with the interest rate being offered and who is offering it. Interest rates change every day and sometimes the market is so volatile that lenders change their rates several during the day. So how do you choose a lender with whom to place your loan?
For the most part, mortgage lenders conduct their business with integrity; however, there are some commissioned loan officers who subscribe to deceptive practices. Those practices are fostered by the supposition that the consumer is shopping for the best interest rate so the deception is in what the buyer doesn’t ask and the loan officer omits telling the customer. If a buyer is basing a lender decision on just the best interest rate, one could be in for a surprise. No lender can have the lowest rates all the time or they will not be in business very long. In fact, the cutting edge of the market lenders are selling their loans to the same institutional investors so the difference is usually in the loan Fees. There will normally not be a great deal of rate difference for the same traditional loan programs between mortgage companies. The disparity is frequently in the settlement fees charged when the consumer closes on the purchase of the property and the associated loan.
The “Real Estate Settlement Procedures Act,” the consumer’s mortgage information, requires all mortgage lenders to provide the applicant with a “Good Faith Estimate” of settlement costs along with other loan disclosure documents within three days of application. The key word here is “application”. An application may be construed as when one makes a formal application and pays for an appraisal and credit report which is standard practice; however, that is not much help when a buyer is comparing lenders. So how homebuyers protect themselves?
The first step is to be prepared when shopping for a loan. The seller of any property the buyer attempts to purchase is going to require a lender’s letter indicating that the prospective buyer has been pre-approved for the loan the buyer’s purchase contract indicates. The requirement is that one applies for a mortgage prior to making an offer. The purchaser is not committed to the lender at this point even though he has completed an application and a credit report has been obtained by the lender. The realtor probably referred the client to a loan officer that he or she trusts and with whom the realtor has had consistent positive experiences. The loan officer offers the no obligation prequalification service in exchange for the realtor’s referrals. In most cases, the realtor’s referral is the loan officer whom the buyer feels most comfortable. The loan officer is likely to protect the buyer’s best interests because, if for no other reason, he or she does not want to jeopardize the relationship with the realtor. However, the buyer should compare interest rate and closing costs with at least two other lenders. This additional information will provide the buyer with the “peace of mind” of knowing that he or she did their homework and provided the criteria to discuss significant differences in the quotes, if there are any. Credit scores, qualifying ratios and closing costs can have a bearing on the rate the customer is quoted. If there are sizable differences, the buyer should look program criteria, loan fees or differences in the qualifying criteria used to determine the interest rate.
The buyer should keep a copy of the application form completed for the pre-approving lender and request an estimate of closing costs. Any rate quote one receives from a subsequent lender that has not evaluated the application and credit report is suspect. Request an estimate of closing costs from each of these lenders. The buyer is now ready to evaluate the quotes. At the beginning of this article, the fact was mentioned that interest rates are volatile. The buyer should conduct all interest rate comparisons on the same day. If not, the comparisons could become invalid.
“The devil is in the details” and the closing costs estimate is the details. The standard industry form is published by The U.S. Department of Housing and Urban Development (HUD). First, the buyer should make sure the loan programs are the same i.e., “30 Year Fixed Rate” vs. “Adjustable Rate Mortgage”. This is detailed in the “Summary of your loan”. There are two other line items on which the buyer should focus. They are items 1 & 2 in “your adjusted origination charges”. These include, “Loan Origination Fee” and “Loan Discount Fee” commonly known as “Points”. Interest rate and points are interchangeable. The normal trade off on a 30 year fixed rate mortgage is .25% (one quarter of one percent) in interest rate is the equivalent of one discount point which is actually 1% of the loan amount. In other words, an interest rate of 6.00% with zero discount points is the same as 5.75% with one discount point in yield to the lender. Actually, the buyer can pay discount points to buy down an interest rate, resulting in a lower monthly payment. It is probably not a good idea to buy down the rate unless the buyer is sure he or she will own the property for at least five years. It will take at least that long for the lower interest rate savings to cover the upfront buy down cost on a dollar for dollar basis.
In summary, the best interest rate is not always the best deal. If the buyer is quoted a lower rate when comparing lenders, he should take a closer look at the lender charges. Loan officers do not always tell the buyer about the exorbitant origination fee or the discount points unless asked, but they must disclose these charges on the Good Faith Estimate. No buyer should make a decision and post fees before reviewing the paperwork. The buyer should probably not place a loan with a loan officer because a relative or a friend works for the same company. The realtor should be in a position to refer the client to a professional loan officer that will consider the best interests of the buyer and explain the details of the process every step of the way. Buying a home is the most important financial decision most people will make. The buyer should always deal with experienced professionals in making real estate purchases.