A wise consumer takes the time to shop around and carefully compare products and services before making a decision, especially if it is a substantial long-term commitment like entering into a 30 year fixed rate mortgage.
Home buyers are highly encouraged by the drop in mortgage rates over the past year. It is a great time to take advantage of rates but there is a little more than just comparing a single number provided by a variety of lenders.
The goal of borrowers is to obtain a loan that suits their situation best. The loan doesn’t just contain the lowest listed rate, but consists of the best combination of rate with other terms like closing costs and points. The goal is to examine the total cost of the loan.
Baseline rate: As a starting point, online sites like Bankrate (www.bankrate.com) and HSH Associates (www.hsh.com) can provide a very quick comparison of current rates within seconds. These sites offer a valuable estimate of rates available to borrowers and include the opportunity to input specific parameters like property state, approximate credit rating, and zip code. Borrowers should also remember check with other sources as well. Local mortgage brokers, banks, credit unions, local and national lenders are all valuable sources to compare when shopping for a loan.
Closing costs: In addition to the price of the home, financing includes other loan-related fees such as title and escrow charges, government recording and transfer charges, and lender fees.
Points: To further compare loans, borrowers should look at how applying “points” affects the baseline rate. Each point is equal to one percent of the loan. For example, on a $200,000 loan, each point is $2000. A borrower that pays or finances points up front, is eligible for a lower rate, and a borrower that uses points toward closing costs will be asked to pay a slightly higher rate. Many borrowers decide to do the latter so that they can hold onto more cash up front instead of paying points, which does not offer the same advantages it once did regarding rate reduction.
Lock-in period: This is the time period–usually 30, 45, or 60 days– in which the interest rate and points quoted to the borrower will be guaranteed.
To compare rates, borrowers need to compare loans with the same parameters side-by-side. For example, compare 30 year fixed rate mortgage, with rates that reflect no points (or the same number of points) with the same lock-in period. Rates should be compared on the same day as each other. Borrowers can then choose the one that has that “magic mix” of low rate, affordable fees, and points and provides the best scenario over the life of the loan.
Aside from rates and total loan cost comparisons, borrowers may want to take into account if there are special programs available to them like VA or FHA loans. Borrowers entering into long-term loans like a 30 year fixed rate mortgage, will also benefit from finding a lender they can trust.