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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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