How to Compare and Negotiate a Morgage Loan
Shopping around for a home loan or mortgage will help you to get the best financing deal. A mortgage, whether it’s a home purchase, a refinancing, or a home equity loan, is like a product 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 during the life of the loan.
Home loans are available from several types of lenders commercial banks, mortgage companies, brokers, and credit unions. Different lenders will quote you different prices, which is a reason why you should contact several lenders to make sure you’re getting the best price. Know how much down payment you can afford, and find out all the costs involved with the loan.
When comparing different lenders, knowing only the amount of the monthly payment or the interest rate is not enough. Ask all potential lenders for a quote with the same loan amount, loan terms, and type of loan so that you can compare the information from lender to lender. The following information is the most important to obtain from each lender and broker when comparing quotes:
Rates
- Ask whether rate is fixed or Adjustable and for how long. (Make sure you understand that when interest rates for adjustable-rate loans go up, generally so does the monthly payment.)
- 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 into the loan, expressed as a yearly rate.)
Points
- Are 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, the lower the payment.)
- Ask for points to be quoted to you as a dollar amount (Rather than just as number of points, a solid dollar amount will allow you have a more realistic idea how much you will have to pay.)
Fees
- 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 which are negotiable. (The list of fees will be included in the good faith estimate that is provided no more than 3 days after applying for a loan.)
- Some fees are paid when you apply for a loan (such as application and appraisal fees), and others are paid at closing and included into the loan. In some cases, you can borrow the money needed to pay these fees, but doing so will increase your loan amount and total costs. (This means you will qualify for a smaller loan amount.)
Down Payments & PMI (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.
- 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.
Once you know what each lender has to offer, negotiate the best deal that you can with the information provided above. 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 price difference may likely be because loan officers and brokers are often allowed to keep some or all of this difference as extra compensation for different loans. When Loan officers or Brokers are compensated their fee is usually built into the prices quoted to consumers. It can occur in both fixed and variable-rate loans and can be in the form of higher points, fees, or interest rate.)
Have the lender or broker explain all the costs associated with the loan on the good faith estimate. 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 that they can have control over. 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, that defeats the purpose and may cost your even more in the long run of the loan.
Once you are satisfied with the terms you have negotiated, you will 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.
Info provided by www.HUD.gov
