How To Shop for the Best Mortgage Loan
Shopping around for the best mortgage deal can be overwhelming. We would like to explain a few things that will help you simplify this process and help you eliminate all of the stress and confusion that you may experience while comparing rates and fees with various lenders. If you want to skip all of the technical stuff, you can scroll all the way to the bottom and get the simplified version of how it all works.
Where Do I Start? How To Shop For a Mortgage
There are lot’s of disclosures when applying for a mortgage but for now you can disregard all of them and essentially focus on only one document. That document is called the “LOAN ESTIMATE” or sometimes referred to as the “LE’. This document is similar to what used to be called the Good Faith Estimate. The loan estimate will tell you everything you need to know about the interest rate and fees that the lender is charging you. It is the only document that you’ll need when shopping for the best mortgage deal.
What is a Loan Estimate
The Loan Estimate is a preliminary estimate on all fees and loan terms such as the interest rate, term, loan amount, fixed/adjustable, etc. This document is standard across the country so Colorado residents will be looking at the same document as others who live in a different State.
How To Read a Loan Estimate
The LE is a very thorough 3 page document but only a few parts are actually important when shopping around for the best mortgage deal. Below, we will be providing screenshots of what you need to focus on and you can also print out a full Loan Estimate here. When shopping around for a mortgage you are comparing 3 items that we cover below. Also make sure that you are comparing the same loan program with each lender. If you are comparing an FHA loan to a conventional loan, the loan estimates will be drastically different.
Page 1/Item#1 of the LE – interest rate
On page 1 you will find the summary of your loan. This will give you the loan interest rate, the length of the loan, the type of loan(fixed or adjustable) and whether the loan has a balloon or prepayment penalty. Review page 1 to make sure the interest rate, and monthly payment are as you have requested. This estimate will also include your taxes and insurance and other 3rd party costs like HOA dues. You also want to make sure if your loan has mortgage insurance. Mortgage insurance is a monthly fee that is added to your monthly payment and effects your APR(annual percentage rate) so make sure you know how much your mortgage insurance is and when it can be removed.
Page 2/Box A(Loan Costs) of the Loan Estimate
Now that you’ve compared the interest rate, we can move on to the closing costs on page 2. The screenshot below is where you will be comparing the lender fees. Box A is the origination charge which includes all fees that the lender is charging. Box A are the only fees that the lender controls. All other fees on the loan estimate are 3rd party fees and/or related to escrow(taxes/insurance). Box B does have some fees that the lender charges but that is usually for 3rd party vendors such as credit reports and appraisals. Lenders do not receive any compensation on fees listed in Box B.
Page 2/Item#3 – Lender credit – VERY IMPORTANT
What is a lender credit? This is a rebate or credit that the lender gives you to help pay for the closing costs. So for example if your closing costs are $5,000 and the lender credit is $4,000, than your actual closing costs are only $1,000.
Why is the lender credit important? The credit basically offsets any lender fees that the lender is charging in Box A. So even though Box may look like the lender is charging a bunch of fees, if the lender credit covers those fees than you will not have to pay for them. If the lender credit exceeds the loan costs in Box A, the rest of the money will go towards the remaining closing costs on page 2(Boxes B-H)
The Short Version
When shopping for a mortgage, you need to request a “Loan Estimate” from the lender. You are comparing only 3 things :
- The interest rate on page 1. For the most part self explanatory. This is the rate the lender is charging. Make sure you are comparing the same loan program and term. So don’t compare a 15 year term with one lender and a 30 year term with another.
- BOX A(loan costs) on page 2. These are the lender fees the lender is charging including but not limited to Points, Application fees, Underwriting, Processing, Administration fees.
- Box J(lender credits) on the bottom right of page 2. This credit will offset loan costs in Box A. If there is additional money left over, the lender credit will help pay for all other closing costs(Boxes B-H)
All other numbers/estimates on the good faith estimate will essentially be the same with every lender including escrows(Boxes E-H), title charges and other 3rd party fees(Box B-C). Don’t get overwhelmed when comparing Loan estimates. Focus on the the 3 items above!
Is It Just About The Rate and Fees?
Although shopping for the lowest interest rates and fees is crucial when finding the right lender, other factors such may also be important. Besides having different rates & fees, lenders will have different programs and guidelines that may impact the client’s decision. In some cases, the client’s financial situation may limit him/her to working with only a certain lender(s). Location may also play a roll when considering which lender to chose.