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Comparing loans of different
lenders is often the most difficult part of mortgage shopping. Firstly, it is
important to keep in mind that mortgage packages consist of more than interest
rates. They consist of a quoted rate,
points and closing costs. Points are an up-front fee paid to the lender at
closing. Each point equals one percent of the loan amount. Points are charged,
or paid, to lower or increase the rate on the loan. Most lenders will allow you
to choose amongst a variety of rate and point combinations for the same loan
product. Therefore, when comparing rates of different lenders, make sure you
compare also the associated points. Closing costs typically consist of loan
related fees, title and escrow charges, government recording and transfer
charges and can add thousands of dollars to the cost of your loan. When
comparing lenders it is important to compare loan related fees (i.e. the fees
which lenders charge to process, approve and make the mortgage loan), since the
other fees are typically independent of the lender. Secondly, when comparing
loans of different lenders you need to thoroughly investigate and compare all
loan features: maximum LTV, mortgage insurance payments (if any), credit and
cash reserve requirements, qualifying ratios, etc. Pay special attention to the
presence of prepayment penalties and the availability and terms of conversion
options (such as rate reduction option, or option to convert an ARM to a
fixed-rate mortgage). Thirdly, for each loan you are comparing find out the
lock-in period, during which the interest rate and points quoted to you will be
guaranteed. Lock-ins of 30, 45 and 60 days are common. Some lenders may offer a
lock-in for only a short period of time (15 days, for example). Usually, the
longer the lock-in period, the higher the price of loan. The lock-in period
should be long enough to allow for settlement before lock-in expires.
Finally, make sure that you are comparing the
interest rates on the same day. Rates change daily, if not a couple of times a
day. So, what is the best way to compare loans among different lenders? First
of all when you compare different lenders you should compare loan products of
the same type (e.g. 30 yr. fixed). It does not make sense to compare different
types of loan programs (e.g. 30 yr fixed vs. 15 yr fixed, or fixed vs.
adjustable).
To compare loan products of the
same type among different lenders:
1. Fix all lenders at one
interest rate and lock-in period.
You have to compare different
lenders on the same rate (e.g. 7.5%) and lock-in period, otherwise you will be
comparing apples and oranges.
Most lenders can offer you a
variety of rate and point combinations for the same loan product and allow you
to choose the lock-in period.
2. Add up the total lender fees
for that rate including points and loan related fees.
There are a number of different
fees paid in connection with loan, and some lenders have different names for
them. One lender might offer to waive one fee and then add another one. So when
comparing loans of different lenders you should look at the total sum of ALL
loan related fees. These fees can include processing and underwriting fee,
mortgage insurance premium, appraisal fee, the cost of a credit report, tax
service fee, application, commitment, wire transfer fee, etc. Points can include
discount and origination points and have to be converted into dollar amounts.
3. The lender that has lower
lender fees has a cheaper loan than the lender with higher fees.
Example: For a loan amount of 100,000 on a 30 yr fixed rate mortgage, lender A
is offering you a rate of 7.375% with 0 points, 7.25% with 0.5 points, and
7.125% with 1 points. He also charges $450 in loan related fees. Lender B offers
you 7.25% on the same loan with 0.375 points, 7.125% with 0.875 points, and 7%
with 1.375 points and charges $680 in loan related fees. Both lenders are
quoting rates on a 45 day lock.
The purpose of this
newsletter is to stimulate thought for our
clients and professionals with whom we network. One should consult with a qualified
mortgage planning professional prior to
implementing any mortgage
planning
strategies. If you are a legal,
insurance, real estate or financial
planning professional receiving this newsletter or know of one,
please contact our office to introduce
yourself and your services to us. We
are always seeking to grow our referral
network and expose professional services
to our client base.
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