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Shopping for Mortgage Loans

Buying a mortgage product is the biggest expenditure most people will ever make. Like most anything else you purchase, you stand to benefit by shopping around for the best deal. You’ll likely be repaying your mortgage over a number of years and the better the interest rate, the less interest you’ll pay. Here are a few tips designed to help you get the best mortgage deal possible.

Review your credit reports

Once you know you’ll soon be shopping for a mortgage, order your credit report from each of the three major credit reporting agencies. With credit reports in hand, carefully view each for accuracy. If you discover any errors, take immediate steps to resolve them. Your credit score is calculated off the information included in your credit reports. Errors can have a negative effect on your credit score, and that can jeopardize your ability to get the best interest rates. Higher interest rates translate into thousands of dollars unnecessarily spent on interest calculated at the higher rate. Or worse, an error may even cause a lender to deny your mortgage application. It’s true. Mortgage denials due to credit report errors are estimated to happen to 50% of the applicants! Why take this kind of gamble when you don’t have to?

Monitor interest rates

Know when interest rates are going up and when they’re going down and avoid applying for a mortgage when they’re on the rise. Interest rates fluctuate all the time, but you don’t need an Economics degree to know how to monitor their movement. Just keep your eye on the key indicators that cause interest rates to fluctuate; current yields on US Treasury notes and bonds. Those government securities tend to reflect the direction in which interest rates will move. Just remember, it’s safest to monitor trends. Don’t try to make predictions.

When you’re in tune with the happenings in both the mortgage market and the Treasury market, you’re better able to lock in a good interest rate and consequently save thousands on interest over the life of your mortgage.

Familiarize yourself with the options

Many different mortgage programs are available and in order to get the best deal, you need to know how each one works. So take time to review your mortgage options before you start shopping. They each work a bit differently, and offer fixed and fluctuating interest rates, consistent monthly payments or payments that vary, shorter loan terms, and other key differences. If you don’t know your options, you’ll have to rely on the mortgage salesperson to steer your decision. And that’s not usually the best approach. Deciding which type of mortgage makes most sense is easier once you know the answers to these important questions:

  • How long do you intend to live in the home you’re buying?
  • How long do you intend to keep the mortgage you’re choosing?
  • How much money is available to put towards the down payment?
  • What percentage of your income can you allocate to the mortgage payment?
  • Do you intend to prepay your mortgage?
  • Do you plan to put additional money towards principal each month?
  • Going forward, is your income more likely to increase, decrease or remain the same?

The direction you feel interest rates will move, the degree of risk you’re most comfortable with, and your income tax bracket are other factors to consider before choosing a mortgage product.

Once you’ve determined the type of mortgage that makes the best financial sense, and know current mortgage interest rates, you’re ready to begin shopping. Although it takes time, you will almost always do better if you compare rates from multiple lenders. Just remember that the interest rate you’re quoted is only one cost associated with obtaining a loan. Points and other closing costs can increase the total cost of your loan by thousands of dollars. To make matters even more confusing, one lender might refer to a particular fee as one name and another might refer to that same fee by calling it a completely different name! A lender might waive one fee but add on another. This is what makes comparing the true costs of the same loan offered by different lenders so difficult.

So do your research and understand the terminology lenders use. Costs associated with mortgage prepayment penalties, down payment amounts, private mortgage, rate lock ins, your payment schedule, the type of mortgage, and more must be clearly identified and understood. For example, often overlooked is the prepayment penalty, a hefty fee imposed by the lender for early repayment of the mortgage. If you know you’ll be moving or refinancing in a few years, find a mortgage that doesn’t include this type of fee, otherwise, you’ll be wasting money.

When you’ve finally decided on a lender and loan product, ask for a list of documents you’ll need to provide to complete the mortgage approval process. And although you don’t want it to happen, understand that mortgage applications aren’t always approved. Ask the lender if lock-in fees and application fees will be refunded should this happen to you.