Shopping for a Mortgage?
Are you ready to take on the task of shopping for a mortgage? Allow me to guide you so that you can find your best rate!
If you have opened up this article, I would fully expect that you are either looking to purchase or refinance a home. If you are not, then you are likely helping someone to purchase. This article will help you understand what to look for. As you apply this knowledge, you will find ways to save on your next mortgage. Stick with me and allow me to help!
Knowing how to shop for a mortgage can save you thousands of dollars just on closing costs. Maybe even tens of thousands on interest over the life of a loan. That’s only if you know what to look for. In my decade of experience, I have rarely met someone who knows what to look for. Why would they? Most consumers will not purchase or refinance a home more than a few times in their lifetime. At the same time, it will likely be their biggest purchase and have the biggest impact on their finances. As a mortgage broker, I can do the majority of the shopping for you. However, there are some things that all clients should be aware of when comparing mortgage companies.
What are your rates?
Shopping for a mortgage can be an overwhelming task if you do not have the help of an experienced loan officer. I have run into many consumers and realtors who call me and ask, “What are your rates?”. When someone asks me this question, I automatically know that they do not know how to shop for a mortgage. I cringe and hope they are not sucked into the person who just states the lowest rate they have heard. This behavior often results on paying high closing costs. There is a balance between closing costs and rates that consumers need to be aware of. Our banking culture has advertised interest rates so much that we fail to understand the big picture in shopping for rates on a mortgage.
There are many factors that are analyzed when determining an interest rate. Among these are credit scores, Loan-to-Values (LTV’s), loan programs, the day the rate is locked, and closing costs. So when you ask a bank or a credit union what their rate is and they reply 5.75%, that may not be anything close to what you will get and that’s not just because rates can change multiple times in a day. Let me explain in detail.
Breaking Down the Costs of an Interest Rate
It’s the beginning of 2023. Interest rates have hit above 7% just a few months ago. Rates have been decreasing and are starting to stabilize a base for the moment. I looked up a competitive credit union for a quote to see where my rates (at Grizz’s Home Loans) and costs compare against theirs. For the record, my rates and costs were better. Upon looking at what they were quoting for rates, I saw they were advertising 5.75% with .125 discount points with an APR as low as 5.837% on a 30yr conventional fixed rate.
If you are like most people, you probably just take note that the rate is 5.75%. That is a bad idea. We don’t know anything about the loan amount, down payment, or other costs, except for the .125% discount point. A loan discount is the cost to buy a rate down. You can always expect the advertised rates to be based on their best pricing and rates because advertisers are trying to draw the consumer in, hoping they don’t know better to look elsewhere. The best qualified clients may be able to get these rates, but that is not most consumers.
And what in the world is an APR (Annual Percentage Rate)?! I need to write an article on APR, but I’m not sure if it will even make sense to most. The best way I find to define APR is that it is a shopping rate to compare all loan costs for the life of the loan. This applies if you were to keep the full term of the loan (ex: 30yrs, 15yrs, etc.). You see and hear “APR” often with interest rates because is required by law to advertise the APR when an interest rate is involved. If your goal is to sell or refinance within 10 years on a 30 year term or any time less than the loan term, the APR is not really even a valid thing to consider. Just be aware.
The Truth Comes Out...
In this credit union’s website, I went to get a “personalized quote”. I used a purchase price of $500,000 and a loan amount of $100,000 with a credit score of 740+ for a conventional 30yr fixed. All of these factors are important to getting an actual estimate/quote. The interest rate was based on a 5.75% interest rate, but I found some other very important details upon getting a more detailed quote. The credit union was charging an origination fee of .75% ($3,000) with a processing fee and .5% ($2,000) in loan discount costs. This means that in order for me to get a 5.75% interest rate, I was going to be paying an additional $5,000 with this credit union!
This is not uncommon. Many people don’t even consider the additional costs and that is their biggest mistake. I personally use this unnamed credit union and they are a very good institution. My point is: there is more to shopping for a mortgage than looking at the interest rate.
Keys to Watch for When Shopping for a Mortgage
Here are a few things that you need to look at when comparing rate and costs with different mortgage companies:
- Make sure the quote is given on the same day (close to the same time) and not on a day when rates have changed three times during the day. Three changes in a day are uncommon, but it’s not uncommon to see rates change at least once in a single day.
- When comparing interest rates, make sure you are comparing the same interest rate with the same numbers (purchase price, down payment, credit score, loan amount, and loan program). Any of these differences will not make an apples-to-apples comparison. Be clear with the loan officer what rate you would like to see.
3. Make sure the title fees, recording fees, prepaids, and escrows are the same when comparing bottom lines. If they are not, make sure to take the differences into consideration or take them all out (can be done manually by the consumer) to compare the actual loan companies’ costs. Your title fees, recording fees, prepaids, and escrow establishment will be the same no matter what mortgage company you use. Those fees can vary depending on the county or title company you use, but your mortgage company will need to use the same fees in the end on the closing disclosure. This allows you to compare correctly.
4. Quotes and loan estimates can be disclosed differently. There may be certain fees one company has that another does not. Origination, processing, underwriting, and application fees will likely be different with every company and are important to compare.
5. Don’t forget to calculate any lender credits or discount points. Lender credits (if any) are usually disclosed at the end of a quote so they will not be factored in until you see the bottom line. Discount points should be disclosed near the beginning of the quote. These credits and points will change depending on what rates do.
- If you have questions about comparing quotes, ask your loan officer. They should be honest and transparent with you. If you don’t feel they are looking out for your best interest, it may be time to look for a different company.
7. Realtors should not be your contact for loan questions. Some realtors have an excellent understanding of how loans work, but they are not always experienced in what certain fees are, how different quotes are disclosed, or how certain programs work. When you have loan questions, ask your loan officer. They should be there to help you and look after you.
Conclusion
Keep an eye on these items and you can accurately compare a quote. Asking “what are your rates?” or “what are your closings costs?” are not going to help you find your lowest rates. You will want to request a quote including estimated closing costs from the company you are shopping. As you shop, you will find some loan originators to be more transparent and trustworthy than others. You will also find some to be better at communicating or more knowledgeable. Take all these factors into consideration as you make your decision as to who you will use on your next mortgage. Shopping for a mortgage is more than just the interest rate!
Want to learn more? Check out this article: Lowest Rates May Not Be The Best Rates