Four pieces of advice that apply to everyone thinking about or actively shopping for a mortgage:
- Shop for the best terms
- Compare Options
- Negotiate for even better terms
- If a high net worth individual, contact a financial advisor or estate planning lawyer who might have relationships that can lead to a lower rate or more favorable terms. These individuals will also have ideas of how a home can fit into an estate plan.
The Mortgage Shopping Process
Just like you can buy the food or clothing from a big box or discount store, the same is true of mortgages. Getting the best value means seeing what each type of “store” has to offer. When it comes to mortgages, they are “sold” by several types of lenders:
- Credit unions
- Mortgage companies
- Commercial banks
- Mortgage brokers (represent several companies)
There are also hybrids of the above, where a lender might also act as a broker.
Your real estate agent can also direct you to one of the above. This is often a way to get a preferred rate that you could not have gotten from the same institution on your own. Do not assume that just because you have been loyal to a bank for all of your business that they will give you the best rate. As was the case with this article’s author, he ended up using his savings bank but had to work with a referral from his real estate agent to get a better rate.
Check the Reviews
Referrals count when shopping for a mortgage. Check reliable websites such as these BBB (the Better Business Bureau) reviews for Freedom Mortgage. Research shows that 82% of people see the value in reading reviews.
Ask about Fees
Be sure to ask your lender or broker how they are going to be paid. Brokers are often paid fees that could be tacked on to your closing costs. Do not assume that just because you are in a bank that they are a lender. Don’t be afraid of broker fees if the mortgage they are offering is at a lower rate than a mortgage without fees.
Mortgage Cost Comparison Checklist
Do not compare mortgages by only looking at the monthly payment (although that is important.) Be sure to compare:
- Monthly payment
- Loan Term
- Type of loan (adjustable or fixed)
- If adjustable, determine how the rates will change when interest rates fall and rise.
- Interest Rates (ask if rates are quoted for the day or week)
- Points are another term for fees that are due the broker or lender. Sometimes to lower the interest rate you will need to pay more points. It makes sense that if you pay higher fees, the bank is making more money up front enabling them to charge less for the loan.
- Convert points into a dollar amount, so you fully understand what you are paying. Your broker or lender would gladly do this for you.
- Fees: not every mortgage will have all of these fees or will combine multiple fees into one number. If you cannot get an estimate, use a different lender or broker.
- Application fee
- Appraisal fee
- Loan Originating
- Closing costs
- APR (annual percentage rate): This is percentage rate that incorporates any fees paid to the broker, points, and any other charges. The number itself is the annual interest rate.
Some fees can be avoided with a “no cost” mortgage. Check the interest rate since the “fees” could be charged in the form of a higher interest rate.
Most lenders will require a down payment equal to 20% of the home price. If they require less than 20%, it is common to require the buyer to purchase insurance called PMI (private mortgage insurance). Some government programs require smaller down payments.
As you pay off your mortgage, and as the value of your home increases, you may be able to stop paying for the insurance.
Negotiating for the Best Deal
Do not be shy when playing one lender against another. Like any business, a mortgage lender has a quote to fill and under certain circumstances may be willing to extend a better offer.
Ask for an itemized list of all fees so that you can ask for individual line items to be reduced or waived. Once you land on a price you like, ask the lender to “lock-in” the quote. Some lenders will charge a “lock-in” fee. Lock-ins do not always work in your favor since if rates decline you will not see your rate decline.
Mortgages and Bad Credit
Do not feel that you need to hide any credit problems. Mainstream lenders will often overlook problems such as unemployment. Request a credit report from one of the credit reporting agencies and proactively address any issues with the mortgage lender. Credit reporting agencies include Equifax, Experian, and TransUnion.