How to shop for a home loan
Prospective homebuyers spend plenty of time looking for just the right house, but nearly half fail to shop for a mortgage. That mistake could cost the typical consumer thousands -- even tens of thousands -- of dollars over time.
A recent survey by the Consumer Financial Protection Bureau found that three out of four consumers apply for a loan with only a single lender, rather than applying with multiple lenders to see which one might offer the best deal. Nearly as many said their main source of information about home loans was the mortgage lender or broker, which obviously has a financial interest in selling you a loan.
Meanwhile, interest rates and fees can vary dramatically from one lender to the next. And even seemingly small differences can add up to thousands of dollars over time. Consider a homeowner who takes out a $350,000 loan. If he secures a 30-year mortgage at 3.75 percent interest instead of 4.25 percent, he'll pay roughly $100 less per month, or $36,000 less over the life of the loan.
"Consumers spend considerable time looking at different neighborhoods and at different homes for sale. The same should be true when choosing among possible mortgage loans," said Richard Cordray, director of the CFPB in a statement. "You are literally betting the house on the choices you are making, and it can be highly beneficial to shop around."
So what do you need to be aware of to get the best deal on a mortgage?
Know your score: Your credit score determines whether you get the best loan rate, and even whether you can borrow at all. According to the CFPB's new "Owing a home" calculator, a borrower with a credit score of 650 would find relatively few lenders vying for his business and most would lend at a 4.5 percent rate. If this same borrower had a credit score of 750, he or she would be able to borrow at a 3.625 percent rate in today's market. This difference in rates amounts to about $50 per month per $100,000 borrowed. Thus the monthly mortgage on a $100,000 loan would be $456 for the borrower with great credit and $507 for the borrower with marginal credit.
Consumers can check their credit score for free at CreditKarma. If your score isn't high enough to qualify for a favorable rate, you might want to examine what's pulling your score down and address those issues before attempting to buy a home.
Decide on terms: One of the main reasons mortgage shopping seems complex is that there are dozens of different types, including fixed, adjustable and hybrid loans. The right type of mortgage will depend on how long you're likely to own the home and what you can afford.
The most common products are 30-year fixed-rate loans, 15-year fixed-rate loans and so-called 5/1 adjustable-rate loans.
Adjustable loans are the lowest cost, starting at 2.625 percent in today's market, according to BankRate.com. That would amount to a $803 monthly payment for someone taking out a $200,000 loan. The potential problem with this type of loan is that both the interest rate and the payment can rise after the fifth year -- and every year after that -- until it hits the lifetime cap, which is usually 5 or 6 percentage points above the initial rate.
In this case, that means the loan rate could go as high as 8.625 percent, which would nearly double the monthly payment. However, for those likely to stay in the home for five years or less, this loan is likely to be the lowest cost.
Planning to keep your house a lot longer? Then a 15-year or 30-year fixed rate mortgage may be a better option. Rates on 30-year loans are higher -- about 3.9 percent today versus 3.1 percent for a 15-year loan. But because the 15-year mortgage must be paid off much faster, the monthly payment is higher -- $1,381 per month on a $200,000 15-year loan compared with $940 per month on the 30-year mortgage. If you can afford the higher monthly payment, the 15-year loan is the best deal. But if making the higher payment is likely to be a struggle, and you don't want to gamble with the roof over your head, stick with the 30-year, fixed-rate loan.
Watch the "points:" One way to secure a more attractive loan rate is to pay "points." These are upfront fees that are calculated as a percentage of your loan amount. A lender may offer to give you, say, a 4 percent rate rather than a 4.2 percent rate if you pay 1 percent of the loan amount in up-front points. It's not a bad deal to pay points if you're planning to be in the home for a long stretch and like the idea of buying down the rate. However, not all lenders charge points. So to make sure you're making apples-to-apples comparisons, look to see whether each loan includes points and insist that every lender provide a "no-point" rate and a rate with an equal number of points.
Beware fees: Lenders also vary greatly in how much they charge in fees. Some rate-shopping sites, such as Bankrate.com, will include fee estimates in rate comparisons. And all lenders must provide a "good faith estimate" of their final fees and charges when you start the loan process. Since these fees and charges can also add to thousands of dollars, be sure to compare the estimates -- and ask about anything that seems amiss -- before you sign for a loan.
Start shopping: There are many ways to hunt of for a mortgage. You can hire a mortgage broker to shop for you, use a rate-shopping site or simply start calling lenders. Or, ideally, do all three. Make a grid that allows you to keep track of the different rates and make sure you're comparing all the financial details -- rates, terms and fees.
If you have a preferred lender or a broker you'd like to work with, also keep in mind that loan rates and fees can be negotiable. If you've been offered a great rate, but prefer a different lender, go to your preferred lender and see if they can match the lowest rate and best terms. If you've got a great credit score or a good relationship with that lender, there's a decent chance that the lender will bend the terms of the deal to accommodate you.
For a primer on buying a home and getting the right financing, check out this CFPB's "Owning a Home" guide.
