How do you know if you are getting the best deal? It is more than just the interest rate. You 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 times each day. So how do you choose a lender to place your loan with?
For the most part, mortgage lenders conduct their business with integrity 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 you don’t ask and the loan officer doesn’t tell you. If you are basing your lender decision on just the best interest rate, you could be in for a surprise. No lender can have the lowest rates all the time or they won’t be in business very long. In fact, cutting edge of the market lenders are all selling their loans to the same institutional investors so the difference is usually in the profit margin. There will not normally 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 you close on the purchase of the property and the associated loan.
The “Real Estate Settlement Procedures Act”, the consumer’s mortgage daddy, 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 you make formal application and pay for an appraisal and credit report which is standard practice. Well, that doesn’t help when you are comparing lenders. So how do you protect yourself?
The first step is to be prepared when you shop your loan. The seller of the any property you will attempt to purchase is going to require a lender’s letter indicating you have been pre-approved for the loan your purchase contract indicates you have applied for. This requires that you apply for a mortgage prior to making your offer. You are not committed to the lender at this point even though you have completed an application and a credit report has been obtained. Your realtor probably referred you to a loan officer that he or she trusts and has had consistent positive experiences with. The loan officer offers the no obligation prequalification service in exchange for the realtor’s referrals. If everything is equal, that is the lender you should end up with. The loan officer is likely to protect your best interests because, if for no other reason, he or she does not want to jeopardize the relationship with the realtor. However you should compare interest rate and closing costs with at least two other lenders. This will provide you with the “peace of mind” of knowing you did your homework and put you in position 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 you are quoted. If there are sizable differences the odds are that there is something wrong.
To save time you should keep a copy of the application form you completed for the pre-approving lender and request an estimate of closing costs. Any rate quote you receive from a subsequent lender that has not evaluated your application and credit report is suspect. Request an estimate of closing costs from each of these lenders. You are now ready to evaluate the quotes. Remember at the beginning of this article we mentioned that interest rates are volatile. You should do all of your shopping on the same day if you are going to compare apples with apples. It could be a completely different picture next week.
As they say, the devil is in the details and the closing cost estimate is the details. The standard industry form is published by The U.S. Department of Housing and Urban Development (HUD). First make sure the loan programs are the same i.e.; “30 Year Fixed Rate” verses “Adjustable Rate Mortgage”. This is detailed in the “Summary of your loan” There are two other line items you should focus on. They are items 1 amp; 2 in “your adjusted origination charges”. What this boils down to is “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 you can pay discount points to buy down your interest rate; resulting in a lower monthly payment. It is probably not a good idea to buy down your rate unless you are sure you 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.
To summarize, the best interest rate isn’t always the best deal. If you are quoted a lower rate when comparing lenders, take a close look at the lender charges. Loan officers don’t always tell you about the exorbitant origination fee or the discount points unless you ask but they must disclose these charges on the Good Faith Estimate. Don’t make your decision and post fees before you review the paperwork.
In conclusion, you probably should not place your loan with a loan officer because your relative or a friend works for the same company. Your realtor should be in a position to refer you to a professional loan officer that will consider your best interests and explain the process every step of the way. The “American Dream” can easily become the “American Nightmare” if you are not dealing with professionals.