How and Why to Compare Mortgage Lenders
Shopping for a mortgage loan requires you to do quite a bit of homework. You must examine your own finances, review your credit reports for accuracy, compare mortgage lenders and terms, and more. This article gives you a blueprint for success.
But this homework is necessary and important, and it should therefore not be neglected. After all, you will have your mortgage loan for quite some time -- either until you sell the home, refinance the loan, or sell the home. In any case, you need to conduct thorough research to protect your own financial interests.
This article will focus on one particular area of search. In this article, I'll explain how to compare one mortgage lender to another in order to find the best mortgage terms for your needs. So let's begin:
Why Compare Lenders Anyway?
You wouldn't walk onto a car lot and buy the first car you liked without driving it, researching the features, and comparing it to other models. The same is true when it comes to mortgage loans and lenders, except there's a lot more money on the line.
Some home buyers think that they will be offered the same mortgage deal by different lenders simply based on their credit score, financial background, etc. But this is not the case at all. When shopping for mortgage loan and comparing lenders to one another, you could ten different quotes from ten different lending institutions.
The reason for these differences has to do with the mortgage lenders themselves. Each company will view you in slightly different ways. They will interpret your credit score in slightly different ways, as far as labeling you as a high risk or a low one. In addition, some lenders have higher overheads / operating costs than others, so they must pass on some of this expense to their customers (usually in the form of fees).
That is why it's so important to compare lenders and to carefully review the information they present to you, ideally with a financial advisor of some kind (or at least someone who is mortgage-savvy).
So what should you be looking for during this process? Well, a lot actually. But let's focus on three of the most important considerations -- interest rates, closing costs, and penalties.
1. Interest Rate
For most home buyers, this is the first thing that comes to mind when they compare one mortgage lender to another. The reasons are obvious, as the interest rate will directly influence the amount of money you pay each month.
But here's what many home buyers don't know. The interest rate offered by mortgage lenders will vary from one lender to the next, based on (A) how they interpret your creditworthiness, (B) how their business is doing in general, and (C) what kind of costs are associated with closing the loan.
So when you compare lenders prior to signing the "dotted line," be sure you have a clear understanding of the interest rate being offered. Is it a fixed rate for the life of the loan? Or is it a variable rate that will adjust and increase in five years? If it does adjust, what can you expect in terms of a higher mortgage payment each month? These are all questions you need to ask in advance when comparing mortgage lenders and the loans they offer you.
2. Other Costs and Fees
Collectively, these costs are referred to as closing costs, and payment is often deferred until the closing / settlement process. Many home buyers fail to ask about these costs in advance and are therefore shocked when closing time comes around. When your compare mortgage lenders prior to taking on a loan, ask about these costs in advance.
The lender is required by law to give you an estimate of what they will be. This is called the "good faith estimate," and it gives you a general idea of what your closing costs will be. Of course, mortgage lenders are notorious for providing good faith estimates that are on the low side, and then charging more at the actual closing. But at least it gives you an idea.
3. Penalties of Any Kind
Find out about penalties. For example, some lenders will charge you a penalty if you try to pay more than the balance due. In other words, if you try to pay the mortgage loan off early by making bigger payments, the lender may charge a penalty for it. After all, they want you in it for the long haul, because they make more money from interest that way. Ask about these penalties when you compare one lender to another.
Get an estimate of closing costs. This is called a "good faith estimate," the mortgage lenders are actually required by law to provide it to you in advance.