HOW TO GET THE BEST HOME FINANCING
QUESTION:Did you know home loan shopping could help
get the best financing deal?
The following home mortgage-shopping guide may help.
Obtain Information from Several Lenders
A mortgage—whether it's a home purchase, a refinancing, or a home equity
loan—is a product, just like a car, so the price and terms may be negotiable.
You'll want to compare all the costs involved in obtaining a mortgage. Shopping,
comparing, and negotiating may save you thousands of dollars.
Home loans are available from several types of lenders—thrift
institutions, commercial banks, mortgage companies, and
credit unions. Different lenders may quote you different prices, so you should
contact several lenders to make sure you're getting the best price. You can also
get a home loan through a mortgage broker. Brokers arrange transactions
rather than lending money directly; in other words, they find a lender for you.
A broker's access to several lenders can mean a wider selection of loan products
and terms from which you can choose. Brokers will generally contact several lenders
regarding your application, but they are not obligated to find the best deal
for you unless they have contracted with you to act as your agent. Consequently,
you should consider contacting more than one broker, just as you should with
banks or thrift institutions.
Whether you are dealing with a lender or a broker may not always be clear.
Some financial institutions operate as both lenders and brokers. Moreover, most
brokers' advertisements do not use the word "broker”. Therefore, be
sure to ask whether a broker is involved. This information is important because
brokers are usually paid a fee for their services that may be separate from and
in addition to the lender's origination or other fees. A broker's compensation
may be in the form of "points" paid at closing or as an add-on to your interest
rate, or both. You should ask each broker you work with
how he or she will be compensated so that you can compare the different fees.
Be prepared to negotiate with the brokers as well as the lenders.
Obtain All Important Cost Information
Be sure to get information about mortgages from
several lenders or brokers. Know how much of a down payment you can afford, and
find out all the costs involved in the loan. Knowing just the amount of the monthly
payment or the interest rate is not enough. Ask for information about
the same loan amount, loan term, and type of loan so that you can compare the
information. The following information is important to get from each lender and
- Ask each lender and broker for a list of its current mortgage interest rates
and whether the rates being quoted are the lowest for that day or week.
- Ask whether the rate is fixed or adjustable. Keep
in mind that when interest rates for adjustable-rate loans go up, generally so
does the monthly payment.
- If the rate quoted is for an adjustable-rate loan, ask how your rate and
loan payment will vary, including whether your loan payment will be reduced when
rates go down.
- Ask about the loan's annual
percentage rate(APR). The APR takes into
account not only the interest rate but also points, broker fees, and certain
other credit charges that you may be required to pay, expressed as a yearly rate.
fees paid to the lender or broker for the loan and are often linked to the interest
rate; usually the more points you pay, the lower the rate.
- Check your local newspaper for information about rates and points currently
- Ask for points to be quoted to you as a dollar amount—rather than just
as the number of points—so that you will actually know how much you will
have to pay.
A home loan often involves many fees, such as loan
origination or underwriting fees, broker fees, and transaction,
settlement, and closing costs. Every lender or broker should
be able to give you an estimate of its fees. Many of these fees are negotiable.
Some fees are paid when you apply for a loan (such as application and appraisal
fees), and others are paid at closing. In some cases, you can borrow the money
needed to pay these fees, but doing so will increase your loan amount and total
costs. "No cost" loans are sometimes available, but they usually involve
- Ask what each fee includes. Several items may be lumped into one fee.
- Ask for an explanation of any fee you do not understand. Some common fees
associated with a home loan closing are listed on the Mortgage Shopping Worksheet
in this brochure.
Down Payments and Private Mortgage Insurance
Some lenders require 20 percent of the home's purchase price as a down payment.
However, many lenders now offer loans that require less than 20 percent down—sometimes
as little as 5 percent on conventional
loans. If a 20 percent down payment is not made, lenders
usually require the home buyer to purchase private
mortgage insurance (PMI)to protect the lender in case the
home buyer fails to pay. When government-assisted programs such as FHA (Federal
Housing Administration), VA (Veterans Administration), or Rural Development Services
are available, the down payment requirements may be substantially smaller.
- Ask about the lender's requirements for a down payment, including what you
need to do to verify that funds for your down payment are available.
- Ask your lender about special programs it may offer.
If PMI is required for your loan,
- Ask what the total cost of the insurance will be.
- Ask how much your monthly payment will be when including the PMI premium.
- Ask how long you will be required to carry PMI.
Obtain the Best Deal That You Can
Once you know what each lender has to offer, negotiate for the best deal that
you can. On any given day, lenders and brokers may offer different prices for
the same loan terms to different consumers, even if those consumers have the
same loan qualifications. The most likely reason for this difference in price
is that loan officers and brokers are often allowed to keep some or all of this
difference as extra compensation. Generally, the difference between the lowest
available price for a loan product and any higher price that the borrower agrees
to pay is an overage.When
overages occur, they are built into the prices quoted to consumers. They can
occur in both fixed and variable-rate loans and can be in the form of points,
fees, or the interest rate. Whether quoted to you by a loan officer or a broker,
the price of any loan may contain overages.
Have the lender or broker write down all the costs associated with the loan.
Then ask if the lender or broker will waive or reduce one or more of its fees
or agree to a lower rate or fewer points. You'll want to make sure that the lender
or broker is not agreeing to lower one fee while raising another or to lower
the rate while raising points. There's no harm in asking lenders or brokers if
they can give better terms than the original ones they quoted or than those you
have found elsewhere.
Once you are satisfied with the terms you have negotiated, you may want to
obtain a written lock-in from
the lender or broker. The lock-in should include the rate that you have agreed
upon, the period the lock-in lasts, and the number of points to be paid. A fee
may be charged for locking in the loan rate. This fee may be refundable at closing.
Lock-ins can protect you from rate increases while your loan is being processed;
if rates fall, however, you could end up with a less favorable rate. Should that
happen, try to negotiate a compromise with the lender or broker
Remember: Shop, Compare, Negotiate
When buying a home, remember to shop around, to compare costs and terms, and
to negotiate for the best deal. Your local newspaper and the Internet are good
places to start shopping for a loan. You can usually find information both on
interest rates and on points for several lenders. Since rates and points can
change daily, you'll want to check your newspaper often when shopping for a home
loan. However, the newspaper does not list the fees, so be sure to ask the lenders
Fair Lending Is Required by Law
The Equal Credit Opportunity Act prohibits lenders from discriminating
against credit applicants in any aspect of a credit transaction on the basis
of race, color, religion, national origin, sex, marital status, age, whether
all or part of the applicant's income comes from a public assistance program,
or whether the applicant has in good faith exercised a right under the Consumer
Credit Protection Act.
The Fair Housing Act prohibits discrimination in residential real
estate transactions based on race, color, religion, sex, handicap, familial status,
or national origin.
Under these laws, a consumer cannot be refused a loan based on these
characteristics nor be charged more for a loan or offered less favorable
terms based on such characteristics.
Credit Problems? Still Shop, Compare, and Negotiate
Don't assume that minor credit problems or difficulties stemming from unique
circumstances, such as illness or temporary loss of income, will limit your loan
choices to only high-cost lenders.
If your credit report contains negative information that is accurate, but
there are good reasons for trusting you to repay a loan, be sure to explain your
situation to the lender or broker. If your credit problems cannot be explained,
you will probably have to pay more than borrowers who have good credit histories.
However, don't assume that the only way to get credit is to pay a high price.
Ask how past credit history affects the price of your loan and what you would
need to do to get a better price. Take the time to shop around and negotiate
the best deal that you can.
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Information provided by this website is general and is not a substitute for professional
advice. Please consult your investment advisor and/or attorney before entering
into any transaction.