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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 a product, just like a car, 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.
Obtain Information
from Several Lenders
Home
loans are available from several types of lenders--thrift institutions,
commercial banks, mortgage companies, and credit unions. Different lenders may
quote you different prices, so you should contact several lenders to make sure
you’re getting the best price. You can also get a home loan through a
mortgage broker. Brokers arrange transactions rather than lending money
directly; in other words, they find a lender for you. A broker’s access
to several lenders can mean a wider selection of loan products and terms from
which you can choose. Brokers will generally contact several lenders regarding
your application, but they are not obligated to find the best deal for you
unless they have contracted with you to act as your agent. Consequently, you
should consider contacting more than one broker, just as you should with banks
or thrift institutions.
Whether
you are dealing with a lender or a broker may not always be clear. Some
financial institutions operate as both lenders and brokers. And most
brokers’ advertisements do not use the word "broker."
Therefore, be sure to ask whether a broker is involved. This information is
important because brokers are usually paid a fee for their services that may be
separate from and in addition to the lender’s origination or other fees.
A broker’s compensation may be in the form of "points" paid at
closing or as an add-on to your interest rate, or both.
You should ask each broker you work with how he or she will be compensated so
that you can compare the different fees. Be prepared to negotiate with the
brokers as well as the lenders.
Obtain All Important Cost Information
Be
sure to get information about mortgages from several
lenders or brokers. Know how much of a down payment you can afford, and find
out all the costs involved in the loan. Knowing just the amount of the monthly
payment or the interest rate is not enough. Ask for information about the same
loan amount, loan term, and type of loan so that you can compare the
information. The following information is important to get from each lender and
broker:
Rates
· Ask each lender and broker for a
list of its current mortgage interest rates and whether the rates being quoted
are the lowest for that day or week.
· Ask whether the rate is fixed or adjustable. Keep in
mind that when interest rates for adjustable-rate loans go up, generally so
does the monthly payment.
· If the rate quoted is for an
adjustable-rate loan, ask how your rate and loan payment will vary, including
whether your loan payment will be reduced when rates go down.
· 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,
expressed as a yearly rate.
Points
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.
· Check your local newspaper for
information about rates and points currently being offered.
· Ask for points to be quoted to you as a dollar
amount--rather than just as the number of points--so that you will actually
know 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 of these fees are negotiable. Some fees are paid
when you apply for a loan (such as application and appraisal fees), and others
are paid at closing. In some cases, you can borrow the money needed to pay
these fees, but doing so will increase your loan amount and total costs.
"No cost" loans are sometimes available, but they usually involve higher
rates.
· Ask what each fee includes. Several
items may be lumped into one fee.
· Ask for an explanation of any fee you do not
understand. Some common fees associated with a home loan closing are listed on
the Mortgage Shopping Worksheet in this brochure.
Down Payments and 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.
· Ask your lender about special
programs it may offer.
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 the PMI premium is included.
Obtain the Best Deal That You Can
Once you know what each lender has to offer, negotiate for the best
deal that you can. 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 most likely reason for this difference
in price is that loan officers and brokers are often allowed to keep some or
all of this difference as extra compensation. Generally, the difference between
the lowest available price for a loan product and any higher price that the
borrower agrees to pay is an overage. When overages
occur, they are built into the prices quoted to consumers. They can occur in
both fixed-rate and variable-rate loans and can be in the form of points, fees,
or the interest rate. Whether quoted to you by a loan officer or a broker, the
price of any loan may contain overages.
Have the lender or broker write down all the costs associated with the
loan. 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. 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. There’s no harm in
asking lenders or brokers if they can give better terms than the original ones
they quoted or than those you have found elsewhere.
Once you are satisfied with the terms you have negotiated, you may 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.
If that happens, try to negotiate a compromise with the lender or broker.
Remember: Shop, Compare, Negotiate
When
buying a home, remember to shop around, to compare costs and terms, and to
negotiate for the best deal. Your local newspaper and the Internet are good places
to start shopping for a loan. You can usually find information both on interest
rates and on points for several lenders. Since rates and points can change
daily, you’ll want to check your newspaper often when shopping for a home
loan. But the newspaper does not list the fees, so be sure to ask the lenders
about them.
The
Mortgage Shopping Worksheet that follows may also help you. Take it with you
when you speak to each lender or broker and write down the information you
obtain. Don’t be afraid to make lenders and brokers compete with each
other for your business by letting them know that you are shopping for the best
deal.
Fair Lending Is Required by Law
The
Equal Credit Opportunity Act prohibits lenders from discriminating against
credit applicants in any aspect of a credit transaction on the basis of race,
color, religion, national origin, sex, marital status, age, whether all or part
of the applicant’s income comes from a public assistance program, or
whether the applicant has in good faith exercised a right under the Consumer
Credit Protection Act.
The
Fair Housing Act prohibits discrimination in residential real estate
transactions on the basis of race, color, religion, sex, handicap, familial
status, or national origin.
Under
these laws, a consumer cannot be refused a loan based on these characteristics
nor be charged more for a loan or offered less favorable terms based on such
characteristics.
Credit Problems? Still Shop,
Compare, and Negotiate
Don’t assume
that minor credit problems or difficulties stemming from unique circumstances,
such as illness or temporary loss of income, will limit your loan choices to
only high-cost lenders.
If your credit
report contains negative information that is accurate, but there are good reasons
for trusting you to repay a loan, be sure to explain your situation to the
lender or broker. If your credit problems cannot be explained, you will
probably have to pay more than borrowers who have good credit histories. But
don’t assume that the only way to get credit is to pay a high price. Ask
how your past credit history affects the price of your loan and what you would
need to do to get a better price. Take the time to shop around and negotiate
the best deal that you can.
Whether you have
credit problems or not, it’s a good idea to review your credit report for
accuracy and completeness before you apply for a loan. To order a copy of your
credit report, visit www.annualcreditreport.com
,
call 877-322-8228, or contact:
Equifax:
(800) 685-1111
TransUnion: (800) 916-8800
Experian: (888) 397-3742
Glossary
Adjustable-rate loans, also
known as variable-rate loans, usually offer a lower initial interest rate than
fixed-rate loans. The interest rate fluctuates over the life of the loan based
on market conditions, but the loan agreement generally sets maximum and minimum
rates. When interest rates rise, generally
so do your loan payments; and when interest rates fall, your monthly payments
may be lowered.
Annual
percentage rate (APR) is the cost of
credit expressed as a yearly rate. The APR includes the interest rate, points,
broker fees, and certain other credit charges that the borrower is required to
pay.
Conventional loans are mortgage loans other than those insured or guaranteed by a
government agency such as the FHA (Federal Housing Administration), the VA
(Veterans Administration), or the Rural Development Services (formerly know as
Farmers Home Administration,
or FmHA).
Escrow is the holding of money or documents by a neutral
third party prior to closing. It can also be an account held by the lender (or
servicer) into which a
homeowner pays money for taxes and insurance.
Fixed-rate
loans generally have repayment terms
of 15, 20, or 30 years. Both the interest rate and the monthly payments (for
principal and interest) stay the same during the life of the loan.
The
interest rate is the cost of borrowing money expressed as a percentage
rate. Interest rates can change because of market conditions.
Loan
origination fees are fees charged by
the lender for processing the loan and are often expressed as a percentage of
the loan amount.
Lock-in refers to a written agreement guaranteeing a home
buyer a specific interest rate on a home loan provided that the loan is closed
within a certain period of time, such as 60 or 90 days. Often the agreement
also specifies the number of points to be paid at closing.
A
mortgage is a document signed by a borrower when a home loan is made
that gives the lender a right to take possession of the property if the
borrower fails to pay off the loan.
Overages are the difference
between the lowest available price and any higher price that the home buyer
agrees to pay for the loan. Loan officers and brokers are often allowed to keep
some or all of this difference as extra compensation.
Points are fees paid to the lender for the loan. One point
equals 1 percent of the loan amount. Points are usually paid in cash at
closing. In some cases, the money needed to pay points can be borrowed, but
doing so will increase the loan amount and the total costs.
Private mortgage insurance (PMI)
protects the lender against a loss if a borrower defaults on the loan. It is
usually required for loans in which the down payment is less than 20 percent of
the sales price or, in a refinancing, when the amount financed is greater than
80 percent of the appraised value.
Thrift
institution is a general term for
savings banks and savings and loan associations.
Transaction, settlement, or closing costs may include application fees; title examination,
abstract of title, title insurance, and property survey fees; fees for
preparing deeds, mortgages, and settlement documents; attorneys’ fees;
recording fees; and notary, appraisal, and credit report fees. Under the Real
Estate Settlement Procedures Act, the borrower receives a good faith estimate
of closing costs at the time of application or within three days of
application. The good faith estimate lists each expected cost either as an
amount or a range.
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