How to Shop for a Mortgage: Shop, Compare, Negotiate

With literally thousands of different mortgage products being offered by lenders, shopping for a mortgage and getting the best interest rate can be confusing. The consumer advocates at the Federal Trade Commission (in conjunction with at least 10 other federal agencies) have published a free, mortgage advice brochure that guides would-be borrowers through the initial stages of the mortgage process.

Shop, Compare and Negotiate

If, as many people say, “location, location, location” are the three most important words in real estate, then “shop, compare and negotitate” are the three most important words for people looking for a mortgage. The Federal Trade Commission titled its brochure, which is available online: “Looking for the Best Mortgage: Shop, Compare, Negotiate“.

“Shopping around for a home loan or mortgage will help you get the best financing deal. A mortgage — whether it’s a home purchase, refinancing or a home equity loan — is a product, just like a car, so the price and terms may be negotiable. You’ll want to compare all the costs involved in obtaining a mortgage. Shopping, comparing and negotiating may save you thousands of dollars,” the brochure states in its opening paragraph.

Your initial focus should be on gathering information and distilling it so that you can make informed decisions. You should compare and try to negotiate interest rates, fees and other payment terms to make them more favorable to you and your situation. The FTC brochure also contains worksheets consumers can use to compare the variables of financing a home, while outlining sources of home loans and explaining important terms and offering a list of questions consumers should ask while they are looking for financing.

Obtain Information from Several Lenders

On any given day, different lenders and mortgage brokers may offer varying prices for the same loan. Loan rates often depend on market conditions and how well-qualified individual loan applicants are when they apply for a loan, but it can also depend on how much profit the mortgage broker is willing to sacrifice to write a mortgage because they can keep all of their commission or offer a discount. Brokers are not obligated to find the best deal for you (unless you have a signed contract for them to do so) and many brokers often direct consumers to a small stable of their favorite lenders. So shop around.

Obtain All Important Cost Information from Several Sources

Get information about mortgages from several lenders or brokers. Know how much you can afford to finance. However, knowing only the interest rate and monthly payment is not enough, the FTC warns; additionally, you should ask for information from several sources about the same loan amount, loan term and type of loan so that you can compare the information. You should also ask each broker you work with how they will be compensated so that you can compare fees. Ask them about:

• Rates: Ask each lender and broker about current mortgage interest rates and whether the currently available rates are the lowest for that day, week or month. Ask whether the interest rate is a fixed rate or adjustable rate (ARM). If the rate is adjustable, ask how much it could vary over time, including if it could ever go down. Ask about the APR (annual percentage rate), which is a more accurate reflection of what percentage you will pay each month to satisfy the mortgage because the APR includes points, broker fees and other credit charges that you may be required to pay in addition to the monthly principal and interest rate.
• Points: Points are fees paid to the lender, often a percentage of the loan amount and based on the interest rate. Points are a way to lower an interest rate by paying in advance, or “paying down” a loan, but they can be good or bad depending on your particular situation. Many consumer and lender watchdog groups (and some newspapers) keep track of loan offerings, including data about interest rates and how they are affected by points. If you are considering paying points, ask for points to be quoted to you as a dollar amount (instead of “number of points” or a percentage of the toal amount) so that you know definitely what it will cost to “pay down.”
• Fees: Some of the fees associated with obtaining a home loan include: loan origination fees, underwriting fees, broker fees, transaction costs, settlement costs and closing costs. Lenders are required by law to give you an estimate of these fees. Many of these fees are negotiable — although some (such as application fees and appraisal fees) are usually payable when you originate a loan — while others are paid at closing. Depending on your lender, your credit and the home you are buying, you may be able to roll some or all of these fees into your loan (which will increase your loan amount and monthly payment). Ask what each fee includes and what you get for the fee. Ask for an explanation of any fees you do not understand. Although you may not be able to wiggle out of some of these fees, you may be able to negotiate them to lesser amounts.
• Down Payments: Traditionally, lenders have required 20 percent of a home’s purchase price as a down payment, but as the price of homes has escalated, many lenders have relaxed that requirement. Indeed, many people have gotten loans for as little as five percent or less down. Find out what your options are and how a larger or smaller down payment will affect the overall terms of the loan.
• Private Mortgage Insurance: Traditionally, if a buyer put less than 20 percent down on a loan, the lender would require private mortgage insurance (PMI) to protect the lender against loan default. But new regulations have been put inplace that do not always require PMI on certain types of loans even if the down payment is less than 20 percent. Again, check with your lender, as avoiding PMI could save you hundreds of dollars every year. If PMI is required, ask what it will cost and how long it will be required. You can usually get PMI cancelled when your loan-to-value ratio falls to less than 80 percent, but that could require a new appraisal (which also costs extra). PMI, like many aspects of a home loan, might be negotiable depending on your lender and your situation. It doesn’t hurt to ask.

Negotiate for the Best Deal You Can Get

Consumers should ask lenders or loan brokers hard questions, such as: How much (or What percentage) of the loan origination fee and other related fees are your profit and are you willing to offer me a discount? How much of a discount can you offer me and under what conditions? Any extra profit over the lowest rate is generally referred to as an “overage,” which is often built into the price quoted by a lender or mortgage broker.

A smart strategy is to ask a lender for a summary of all fees associated with obtaining a loan from them, then review the fees individually and ask the lender or broker if he can waive or reduce any of the fees or points. Your goal is to get the lender or broker to provide better overall terms than they did originally or that you can get anywhere else.

Lock In the Best Deal

Once you are satisfied with the loan terms you have negotiated, inquire about whether you can lock in the terms, an option many lenders often offer for periods of 30 or 60 days. A lock-in protects you from changing market conditions, such as rising interest rates, during the lock-in period.

The FTC brochure includes extra tips and information, as well as a glossary, worksheets and links to other brochures dealing with buying a home. It is an invaluable pamphlet and it’s free. Here is an alternate link to the brochure.

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