How To Comparison-Shop For A Mortgage
It's common for mortgage rate quotes to vary by a full percentage
point (e.g. one bank will charge you 5.5% interest, another will
charge 6.5%.) For a $200,000 house financed with a 30-year
mortgage loan, this 1% rate spread can make a difference of about
$50,000 in how much total interest you'll have to pay the
Best Mortgage Sites Directory:
The best way to shop for a loan is to compare many written
estimates to find the best deal. This could save you hundreds
to thousands of dollars, depending on the value of the real
estate. If you rely on just one source, you may find that
someone will take advantage of your trust. You should insist on
written "good faith estimates". Online quotes can be
trusted only if they are openly posted on the web site, with all
lender fees fully disclosed.
Whether you're purchasing or refinancing, here's how to
comparison-shop for the best mortgage and avoid the many traps
that await homeowners:
- Get a free manual. You can get a free Home-Buying & Mortgage Tutorial mailed to you from
Fannie Mae, a semi-governmental housing finance agency.
- Places To Look. Banks, credit unions,
mortage loan companies, mortgage brokers and online lending sites
are the usual sources. If you have a 401(k) plan you can
borrow up to $50,000. Friends and family may be willing to
help pay, and/or co-sign the loan to allow a lower interest rate.
- Get pre-approved. You'll get a good idea
of what you can afford by getting a pre-approval before selling
your house. Showing the pre-approval to the seller increases your
negotiating power and may help lower the sale price.
- Rate Locks. You can lock in a mortgage
rate at the current level for anywhere from 15 to 60 days, but
there are some pitfalls to avoid. Read What Are "Free" Rate Locks? to understand
the benefits and drawbacks of rate locks.
- Consider ARMs. The "3/1 Adjustable-Rate
Mortgage" (ARM) is about 0.25 to 0.50 points lower than a fixed
rate mortgage, with the first three years locked in at this low
rate. Read the government's Consumer Handbook on ARMs (PDF) and
BankRate.com's Hybrid adjustable mortgages offer advantages to
understand these loan types.
- Fixed mortgages are safer. On the other
hand, the probable future rise in interest rates would not be
good for those who currently are in ARMs.
- FHA loans. These are
government-assisted loans that can be taken out by almost any
home buyer. They require only a 3% downpayment, saving you
a lot of money up front. But you'd have to pay an interest rate
about 0.25% to 0.75% higher, adding up to many thousands of
dollars until you refinance it. And you must also pay FHA
mortgage insurance of about $3,000 for the first year and $1,000
per year thereafter until your home equity reaches 22%.
- Confirm It's A Fair Offer. Use the free
Test My Loan Now site to rate any mortgage offer for fairness and get a counterproposal,
and/or spend about $50 to pay the
National Mortgage Complaint Center to
analyze the fairness of any mortgage offer.
- Avoid The Traps. With so much money at
stake in mortgage deals, some sharp operators will try to take
advantage of trusting people. An online article Goofs That Mortgage Shoppers Make
discusses the worst mistakes and learn how to avoid them.
Here's our own "short list" of the worst mistakes:
Top ten homebuyer traps:|
- Not getting a good faith estimate allows the lender to hit you with surprise fees later on.
- Settling for an oral rate lock allows unscrupulous lenders to legally weasel out of their promise.
- Bait and switch is when a lender quotes you a rate that you know is good,
then after you settle on that lender as your loan source, he pitches you a different loan with
unfair terms, in the hope that you'll trust it's also good and won't study the details.
- Railroading is when a realtor implies that you have to use their recommended lender. You don't!
- Not getting pre-approved for a loan reduces your negotiating power and may increase the sale price.
- Not paying for a home inspection by a licensed & insured professional, which gives you (1) peace of mind and (2) negotiating clout.
- Not reading documents before signing them. Take your time and if you don't understand it, consult a lawyer.
- Relying on one referred lender is bad because no reputation is as good as shopping around.
- Loan shopping on separate days is faulty because market volatility may cause rate quotes to vary.
- Relying on the "APR" to compare loans doesn't work because lenders aren't required to include loan fees in the APR.
(Next Gem: How To Get A Low-Cost Mortgage)