Article 2: How to Compare Mortgage Quotes
When you’re ready to begin applying for a mortgage loan, you shouldn’t just default to using your personal bank or go with the first rate you see. A 2015 study by the Consumer Financial Protection Bureau found that almost half of consumers don’t shop around and compare rates when taking out a mortgage, but this is a big mistake.
The organization recommends getting quotes from at least three lenders so you can compare offerings and get the best deal — and so you’re in a better position to negotiate. Once you determine which type of mortgages loan you need and start applying to get quotes, you will receive a loan estimate that outlines the key details. Here’s what to know as you compare your options.
The term is the amount of time you have to pay back your mortgage, and you may want to look at quotes for more than one term length. For conventional loans, the most common terms are 15 years and 30 years. The shorter the term, the lower your interest rate — but the higher your monthly payment since you have less time to pay it off. There’s usually no penalty for paying down your mortgage early, so if you’re unsure that you can afford the monthly payments that come with a 15-year mortgage, it’s safer to go with a 30-year mortgage and just make extra payments as you can.
Some mortgage quotes include the option to buy points, also called discount points. When you buy points, you are paying more upfront in exchange for a lower interest rate for the life of the loan. Think of it as prepaid interest. Buying points usually only makes sense if you know you’ll have the loan for a long time, since it takes some time to break even on the up-front costs and then begin reaping the rewards of a lower rate.
The interest rate is the cost of borrowing money, and it’s calculated as a percentage. For example, if your interest rate is 4%, you are paying $4 for every $100 you borrow. There are no other fees included in the interest rate. The state of your credit plays a large role in the interest rate you receive, so if you’re not happy with what you get, you may want to work on improving your credit before taking out a mortgage. Note that you may also pay a higher rate if you put down less than 20%.
Many homebuyers think interest rate and APR are the same thing since they are both expressed as percentages and tend to be close in value. But they are different in an important way: the APR factors in other expenses along with the interest rate, giving you a more accurate view of the cost of borrowing money. The APR includes the cost of things like mortgage points, mortgage broker fees, and some closing costs, so it’s usually higher than the interest rate.
There are a variety of fees involved in the mortgage process. There are closing costs, which includes things like appraisal fees and title insurance. There are also lender fees, or origination fees. Some of these may be negotiable depending on the lender, so if you like what you see on one estimate except for the fees, ask the lender if there’s anything you can do to lower them. In most cases, you have the right to shop around for some things like home inspection and homeowners insurance.
Note that some lenders allow you to get lender credits to cover some of the closing costs, but you will be charged you a higher interest rate in exchange.