When Making Mortgage Comparisons, Know What to Look For

If you think comparing mortgage loans from different lenders is easy, you ought to be congratulated! You must know the secrets that countless borrowers don’t. Or do you? Comparing mortgages is one of the most difficult parts of mortgage shopping simply because the way mortgages are negotiated can be so confusing.

You see, a mortgage is more than an interest rate. Much more. Selling mortgages is how mortgage lenders make a profit. While lenders make money on the interest they’re charging over the life of the loan, they also make money by charging all sorts of other fees too; like points and closing costs.

A point is, quite simply, is an up-front fee equal to one percent of the amount borrowed. If you’re borrowing $100,000, one point equals $1,000. Lenders charge (or offer fewer or eliminate altogether) points in exchange for a lower (or higher) rate. Lenders offer various combinations of interest rates and points and what you decide on depends on whether you want to pay more at closing, or over the term of your mortgage. If you choose points in exchange for a lower rate, when comparing different mortgages, you must be certain other lenders are offering the same points/interest rate terms. Otherwise you won’t get a fair comparison.

Closing costs are trickier to compare for two reasons. First, numerous fees are usually included in the closing costs. And second, different lenders sometimes assign different names to the various fees they charge. Closing costs including appraiser fees, recording fees, application fees, credit review fees, points, title fees, escrow fees and more will add thousands of dollars to the cost of a mortgage. When comparing, at least evaluate the costs associated with making, processing and approving a loan as all lenders will charge fees for these tasks. Other fees may be harder to compare.

The features included in different loans offered by different lenders may vary as well. One loan might include a prepayment penalty whereas another might not. Likewise with PMI, qualifying ratios, requirements for cash/credit reserves, maximum LTV, conversion terms, (converting from an ARM to a fixed rate, for example), and more.

Also necessary for fair comparison is an evaluation of each lender’s rate lock in terms. It’s common to lock in rates for longer time periods (30 – 60 days) in order to allow time to process and close the mortgage. However, some rate locks can be as short as 15 days. A briefer lock in, which it may cost less, may not offer the same level of protection so take care when evaluating this fee. Something else to pay close attention to is the day on which an interest rate is quoted as interest rates constantly change, even on the same day.

Comparison tips

• When mortgage shopping, the most important thing you can do is apply for the same type of mortgage product from each lender. A 15-year fixed rate mortgage is not the same as a 30-year fixed rate and it’s definitely not the same as an ARM.
• You must choose the same interest rate AND lock in period from each lender; otherwise you will not be evaluating similar terms.
• Don’t forget to consider the included fees, especially points. Rather than trying to compare individual fees, which is confusing for the reasons stated previously, consider the total cost of the fees each lender is charging. Remember that points, including any origination and discount points, will be expressed as a percentage. To know the true cost, you have to convert the percentage into actual dollars.
• Choose the lender with the lowest closing fees as this will be your least expensive mortgage.