Finding the right home loan by comparing loan offers
You’re at that point where you’ve decided on the type of mortgage loan that best suits your home buying situation. And now you’re ready to look for a lender.
When we think about choosing a mortgage, it’s common to immediately start comparing interest rates from different lenders. While the interest rate is important, it only tells you a limited amount about the loan. There are several other factors that can affect whether that loan is best for your situation. That’s why it’s important to understand how to compare mortgage loan offers.
Mortgages can seem overwhelming. Luckily, the loan estimate document is a great tool to help you evaluate various offers. The Consumer Financial Protection Bureau has a sample estimate you can download. The loan estimate is a standardized form that, by law, the lender must send to you within three days from the time you submit your mortgage application, and they pull your credit report.
This is critical: Ensure you give each lender the same information so you are comparing apples-to-apples when you get all the loan estimates back.
An important note about lenders pulling your credit report
When you request a loan estimate, the lender may require pulling your credit. That request may be recorded as a hard inquiry on your credit report, which could affect your credit score. That can seem a bit scary since you’re most likely getting multiple loan estimates. But the good news is that multiple hard inquiries are usually counted as just one inquiry if they happen within a certain time period (a good rule of thumb is 14 to 45 days).
It’s important for you to get organized and make your request for loan estimates from all lenders within that timeframe. This has another benefit as well. Interest rates change daily. So, if you’re requesting multiple loan estimates on the same day, you don’t have to worry about interest rate fluctuations affecting your apples-to-apples comparison.
Comparing loan estimates
Once you get your loan estimates, it’s time to sit down and go over the details.
Start with the basics - the loan terms
Make sure the loan terms are the same across all your loan estimates. This includes the length of the loan, the type of loan (i.e. conventional, FHA, etc.), the type of rate (fixed or adjustable) and the loan amount.
Note the interest rate
Each lender may offer a different interest rate. Make note of this. But remember – the interest rate is just one factor.
Check out your projected monthly payment
Your interest rate will affect the amount of your monthly payment. But there could be other line items as well.
If your down payment is less than 20% of your home price, you may see a fee for private mortgage insurance (PMI). PMI protects the lender if you are unable to pay your mortgage. There are a few ways to remove PMI, whether by automatic termination or a cancellation request once your loan-to-value reaches 78%.
You’ll also see an estimated escrow. This is the amount the lender adds to your monthly payment to account for your annual property tax payment and homeowner’s insurance premium.
Examine the loan costs and other costs sections
Begin with the origination charges. These are fees the lender will charge to make the loan. They can include everything from underwriting fees to processing fees. Compare them across your loan estimates.
You may also see points that are being charged. Points are upfront fees paid to lower an interest rate. For a deeper dive into the impact of paying points, check out this mortgage points calculator.
In addition, there may be fees for a credit report check, a survey, a title search, and more. Again, compare these across lenders.
There may be other costs as well, like recording fees. You may also have to pre-pay a portion of your homeowner’s insurance or property taxes.
Review the cash to close section
The cash to close section estimates the cash you will need to pay upfront. This includes your down payment and the closing costs. With some loans, you can elect to have your closing costs rolled into your loan amount, which reduces the amount you pay upfront but increases your monthly payment and the amount you will pay over the term of the loan.
Make some broad comparisons
Now that you’ve reviewed factors that may impact getting your loan and the monthly payment, it’s time to take a step back and look at some broader comparisons.
Your loan estimate sheet will have a section on page three called Comparisons. In this section, you will see the Annual Percentage Rate (APR). This is one of the most valuable tools for comparing different loan estimates because it accounts for both the interest rate and the fees to show you which loan is the better option over the length of the loan.
You will also see a 5-year review. This shows you two numbers. First, you’ll see the total you will have paid in loan costs, principal, interest, and mortgage insurance over 5 years. Second, you’ll see the amount of principal you will have paid off after 5 years.
Compare the APR and the 5-year numbers between all your loan estimates.
You should now have a better idea of which offer best fits your needs. For more information on the loan estimate sheet, check out this handy guide.
Congratulations on completing your comparisons! It took a little work, but you’ve built the confidence to decide on your mortgage lender.
At this point, it’s common to have more than one lender on your shortlist. Before you make that final decision, there is one more question to ask. Which lender do you want to work with? Here are some things to think about:
- Who has a long history of helping people get into a home that’s right for them (there’s a reason why they’ve been around a while)?
- Who has made you feel at ease during the process?
- Who makes you feel like they are really trying to help instead of just trying to sell you a mortgage?
- Who makes it as easy as possible to understand?
- Who has high customer satisfaction ratings?
Answering these questions can help you make that final decision. Moreover, you’ll feel more assured in who you select as your mortgage lender.
At First Federal Bank, we’ve been helping our neighbors turn their dream of homeownership into reality for over a century. Talk with one of our friendly, trusted, and knowledgeable mortgage advisors today.