The process of buying a home for the first time brings with it a lot of confusion. From how to finance the purchase to what happens at closing, it’s not something most of us do very often. One of the most important steps in the process, if you won’t be paying cash for the home, is finding a lender and obtaining a loan preapproval letter. But how do you shop for a lender and a loan?
Remember, your mortgage payment will most likely be the largest monthly check you write, so it truly does pay to shop around.
1. It’s Not All About the Interest Rate
It truly is not the fault of consumers that so many focus solely on a loan’s interest rates. The rate is, after all, what lenders advertise and the media focuses on.
Did you know that the interest rate and the APR are not the same? The interest rate is the cost to borrow the money. The annual percentage rate, on the other hand, is the total cost of the loan, including loan costs, points and fees. It’s these additional costs you’ll need to compare when shopping for a lender.
One of the things that most confuses first-time mortgage shoppers is the whole concept of “points.” First, understand that there are two types – origination points and discount points – and both equal 1 percent of the total amount of the loan. For instance, on a $100,000 mortgage, one point equals $1,000.
Think of origination points as the lender’s commission for obtaining your business. Not all lenders charge them, but if yours does, know that these points are negotiable.
Discount points, on the other hand, give you a discount on your interest rate. Each point you purchase lowers the interest rate on your loan by 0.25 percent. If you plan on living in the home for a significant length of time, buying discount points may save you money in the long run, according to Investopedia’s Lisa Smith.
“On a $100,000 mortgage with an interest rate of 6 percent, your monthly payment for principal and interest is $599.55 per month,” Smith says. “With the purchase of three discount points, your interest rate would be 5.25 percent, and your monthly payment would be $552.20 per month.”
One way to make it easier on yourself is to ask each lender that you speak with to express the loan’s points in dollars instead of percentages, suggests the Federal Trade Commission. This lets you know the actual cost, plus it helps when comparing loans.
Mortgage loans come loaded with various fees, some charged by the lender and others by third parties, so ask the lender to separate these for you.
Also ask the lender about the required down payment and the amount of closing costs you will need. If private mortgage insurance is required, ask the lender to make note of the premium.
2. Compare Lenders’ Offers
Each lender will provide you with a form, known as the Good Faith Estimate, within three days of loan acceptance. This is a standardized form that allows the consumer to more easily compare offers among lenders.
Don’t be frightened that your loan has been accepted before you’ve decided on which lender to choose. You aren’t obligated to go with a company until you’ve signed the paperwork.
Compare the APR, of course, but also look carefully at the fee section and compare how much each lender is charging. Many of these fees are negotiable, such as the application fee, loan origination fee, tax servicing and underwriting fees.
If two loans are comparable but you prefer a more expensive loan, negotiate with the lender. Ask how much the fee can be reduced.
3. Lock Your Rate
Since an offered interest rate isn’t binding, locking a mortgage rate ensures that the lender agrees to offer you the stated interest rate for a specified period of time. Standard locks last for 30 days, but costs can vary depending on the number of days, so ensure that each lender you’re comparing quotes the same time period for your rate lock.
Ensure that the rate lock specifies the interest rate, the number of points and the length of the lock period. Keep in mind that if you don’t close your loan before the lock expires, the agreement is no longer valid.
You may also be offered a conditional lock, which may depend on the home appraising as expected or verification of your income and debt. The rate may change if what you stated doesn’t match your documentation, according to the Consumer Financial Protection Bureau.
A mortgage payment is a hefty sum to pay every month, so you owe it to yourself to take your time when choosing a lender. The time you spend researching various offers will definitely pay off down the line.