A free mortgage quote is something that any lender or mortgage broker can provide.
If you give them permission to check your credit, some will ask you to reimburse them for that expense (usually less than $25).
Getting free quotes is the easy part. Comparing quotes can be challenging.
Compare Same Loan
The first thing is to make sure you are being quoted for the exact same loan by all parties. If you are looking for a 30 year fixed loan, make sure one of the quotes is not for a 10 year fixed.
Compare Same Day Quotes
Interest rates change daily. A quote given by one party on a Monday is based on the rates prevailing that day. A quote given on Tuesday is based on different market conditions, and may only be higher or lower because of conditions that day.
The rates you are quoted are estimates. They come in the form of a “Good Faith Estimate” (GFE). These are standard forms to make comparisons easier.
The actual rate you will receive will depend on the rate at which your loan is “locked”. This is when your interest rate is fixed in writing. This can be different than what you are quoted. The loan is locked for a certain number of days – 15, 30, 45, 60, or even more. After this lock period is over, you lose your rate lock. Many lenders can “extend” the rate lock for a small fee, usually in the form of a slightly higher interest rate (that is presumably lower than prevailing rates that day).
Good Faith Estimate
A summary of different charges includes:
Third party fees
These are “neutral party” charges that you will incur anyways in a mortgage transaction, such as the fees for a public filing
Escrow charges – this is the service that a neutral third party (the escrow company) charges for being in the middle of everyone and handling the money in a fair and unbiased manner, in compliance with lender instructions and contracts.
Title insurance – this is the insurance policy that you pay, with the new mortgage lender as the beneficiary. This is a policy that protects the lender from future title issues on your property. Just in case it turns out that the person who sold the house to you was an imposter, didn’t really have title, etc. In case lawsuits are filed by new parties after a transaction claiming to own all or part of the property, this title insurance policy protects the lender. Title insurance costs increase with the value of the property.
Hazard insurance – this is the hazard insurance policy on the property. The lender wants to make sure the policy is in place and paid up for a reasonable amount of time into the future – sometimes up to a year
Document preparation fees, filing fees – these are usually relatively small
Notary public fee – for notarizing the loan documents
Although there may be some room to maneuver on these costs, they are incurred regardless of who you do your loan with.
Loan fees
Your broker’s fees can include a percentage of the loan (each 1% of the loan amount is known as a point), a broker processing fee, broker admin fee, etc.
The lender fees – including underwriting fee, document drawing fee, etc.
Buy down – this is money you pay up front out of the loan to the lender to get a lower interest rate
Prepaid charges
Lenders may require you to prepay several months of property taxes, a couple of weeks of interest, etc. These are prepayments of bills you would pay anyways, so in that sense it is different than other charges
There is sometimes a wide range in the fees that different lenders charge.
The single biggest area of charges is usually in the “loan fees”.
No Points
A lender or broker can charge “no points” upfront because they increase your interest rate.
For example, if a lender quotes you 6.5% with no points, ask them what it would be with 1 point. This should lower the rate around 0.5%, to around 6%.
This is why some quotes will show much lower closing costs (lower loan fees) but have much higher interest rate.
Prepayment Penalty
Also check to see if there is a prepayment penalty. If there is, check:
For how long
What the size of the penalty will be (how it is calculated)
Whether it is triggered only when you sell within the prepayment penalty period (a “soft” prepay) or whether you sell or refinance (a “hard” prepay)
Typically prepayment penalties don’t last for longer than 3 years, but can be shorter or longer.
If you plan on selling your property in 6 months, then a loan with a one year prepayment penalty may not work for you.
Why accept a prepayment penalty? Lenders can offer this as an incentive in exchange for a lower interest rate. If you don’t plan on moving for at least 5 years, then a 1 year prepayment penalty may be something to consider if you get a lower rate.
For more information visit www.archerpacific.com
Loan Library
The author is the owner of Archer Pacific, a mortgage company. The firm's website, http://www.archerpacific.com, has extensive resources and tips on many mortgage topics.
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