Beyond Interest Rate - How to get the best home loan
So you have decided to buy a new home or think the time is right to refinance. Now you need to find the best mortgage rate and terms. A quick internet search will provide you with hundreds of offers, but how do you really know which is the best loan for you? Here are a few tips to help you weed through the offers and focus on the few things that really matter so that you are comparing apples to apples.
Determine the amortization term that fits your goals. You don’t want to compare a fixed rate mortgage to an adjustable rate or a 30 year term to a 15 year term.
Here is a brief overview of the standard mortgage terms:
I would say that greater than 80% of our borrowers choose a 30 year fixed rate mortgage. This term typically gives our borrowers the lowest monthly payment with the added security of a fixed payment.
A 15 year fixed is the next most popular option. While the payment will be higher, you are cutting your mortgage term in half as compared to the 30 year option and will build equity in your home at a much faster rate.
Adjustable Rate Mortgages (ARMs) are currently the least popular term, especially with rates still near historic lows. If you choose an ARM, you will still get a 30 year amortization, but your rate will only be fixed for a specified period of time, typically 3, 5 or 7 years.
TIP: If you are refinancing your current mortgage and do not want to add any years back to your mortgage, ask your Lender if they offer custom terms. For example, if you have paid 3 years on a 30 year term, ask your Lender if they can offer a 27 year fixed. This will allow you to lower your rate without adding years back onto your loan.
Do not look at the total closing costs on the lender’s estimate for the purposes of comparing loans!
Here is why: The total closing costs on a Lender’s estimate includes many different items that are not controlled by your lender and will be the same regardless of which lender you choose. Things like the Title Charges, Transfer Taxes, Title Insurance, Settlement Fees, and Escrows are not paid to or set by your lender. Therefore, when it comes down to closing, these items will be the same for Lender A as they will be for Lender B.
Loan Officers have different methods for providing quotes. Some get a lot of information on the front end to provide a very personalized and detailed quote, while others provide a quote that may not be as accurate based on your exact circumstance. From a compliance standpoint, the Lender isn’t really obligated to provide an accurate quote until you apply and even then, they may not have all of the information to get your quote 100% accurate.
However, the Lender should always quote accurate rates with the applicable points and lender fees. This is where you will want to focus. Don’t get distracted by all of the charges or the totals, and just focus on the rate and the lender charges – Origination, Discount, Appraisal, Underwriting, etc. These are the items controlled by the lender. Also try to find a lender who doesn't charge lender fees.
The lowest rate is not always the rate that best fits your situation. You will want to compare rates with the amount of “points” and fees that fit your circumstance.
Points are typically charged as origination or discount fees and are charged as a percentage of your loan amount. For example, 1 origination or discount point on a $200,000 loan would be a $2000 charge to you.Lenders will charge more points for lower rates, and less or no points for higher rates.
You will also want to consider any lender fees you are being charged. Most lenders will charge an underwriting, processing, administrative fee along with credit report and flood certification charges. You will want to include these fees when you are comparing lender offers.
Let’s look at a quick example:
So Lender A has a lower rate of 3.50%, but they are charging $3100 in lender related fees.
Lender B has a higher rate of 3.75%, but is only charging $1100 in lender related fees.So which lender has the better offer? Well that depends…
The Principal and Interest payment from Lender A would be $898.09 and from Lender B, $926.23. Lender A saves you $28.14 each month in payments. However, it costs you $2000 more upfront to get Lender A’s loan. By dividing $2000 by $28.14, you find that it will take approximately 71 months or 6 years in payments to recoup the additional $2000 you paid Lender A.
So which one is better….If you plan to stay in your home (and not refinance) for 15 years, Lender A will save you some significant money since you will have time to recoup the $2000 in lender fees and then enjoy the lower payment for another 9 years.
But…If you plan to move again (or refinance) in 5 years, Lender B would be the better option since you get save that $2000 in upfront charges. You won’t be in the house long enough to recoup those upfront charges.
Interview your Loan Officer and choose someone that earns your trust.
While I hope that this article gives you better tools to shop for your mortgage based on the numbers, you still want to choose a Lender and a Loan Officer that gives you the confidence that they will deliver the loan on time and as expected. For example, at Triumph, we offer a closing date guarantee so you'll be certain your loan will close on time.
If you are buying a new home in today’s real estate environment where most markets are seller’s markets due to historically low housing inventory, you will need to make sure your lender can close your loan by the contract closing date. If the contract date isn’t met, the Seller has the right to put the home back on the market. You don’t want to lose your dream home because you choose a lender that couldn’t deliver.
Take note of how the Loan Officer communicates with you during the sales process. Do they answer their phone or get back to you quickly? Do they answer your questions clearly? Do they seem eager to earn your business? These are all of the things that can give you an indicator of how they will perform during the loan process.
Travis Chapman has over twenty years experience in mortgage banking as a leading executive of several successful mortgage banks. He presently serves as President of Triumph Bank Home Loans in Collierville, Tennessee.