Conforming mortgage loans (not exceeding $417, 000 in most locations and limited to certain mortgage products) adhere to guidelines set by Freddie Mac (FRMC) or Fannie Mae (FNMA) and can be considered commodities. If your loan is in this range, you have good credit, and don’t need any special treatment, the interest rate and fees could be your primary considerations.
Mortgage Rates: Dare to Compare First, an interest rate quote is basically worthless without additional information. The total cost of the loan includes the interest charged as well as fees, service charges or points paid to the lender, and money paid to third parties such as appraisers and title insurers. One lender’s 5.25% rate might be a better deal than another’s 5% rate if the costs differ.
APR Is not Foolproof The mortgage lender has to disclose these costs within three business days of your loan application date by issuing you a Good Faith Estimate ( GFE). However, many lenders will give you one upfront, making it easier to shop. The federal Truth in Lending Act requires lenders to express the total cost of the loan as an APR, or Annual Percentage Rate. While not perfect, the APR does incorporate the lender fees and makes it easier to compare the same kind of loan between lenders. However, make sure the loans you are comparing are identical. An APR comparison between a 5/1 ARM and a 30 year fixed loan is worthless. APR doesn’t take into account the fact that few borrowers keep the loan the entire term. Examine both the APR and the Good Faith Estimate. If the APRs are close, go for the loan with fewer upfront costs—if you don’t keep the loan for the entire term you won’t be paying for a benefit you didn’t use.
Shop Quickly, Decide Slowly Try to get your quotes the same day. Comparing an APR from one bank’s Monday quote with another bank’s Friday quote won’t be useful. Rates used to change about once a week. However, financial markets are so volatile these days that’s it’s common for rates to change more than once a day! So try to get all your quotes quickly, then go through them carefully. Narrow your search to two or three lenders with competitive rates, then speak with an agent from each. You’ll be discussing rather private things with this person and trusting him or her with an important financing move. Make sure your agent operates in your comfort zone.
It’s Easy to Compare Interest Rate Quotes Online The neighborhood bank isn’t the only game in town anymore. It can take only minutes to get and compare mortgage loan quotes from lenders online. You provide your requirements, the lenders give you their rate and terms, and you can evaluate and choose your loan at home with no pressure. At a minimum it gives you a number to ask the local bank to match. Why not compare and save money when it’s that easy?
Let me address online rate shopping first. Remember that when you see online rates, they may not apply to you. There can be a certain amount of “bait and switch” to these rates that you see online.
For example, they usually are quoting a “best case” rate. If you don’t have high credit scores, a low loan to value ratio, and the property is in certain areas, such as Texas, you probably aren’t going to get the rate being advertised. The other question is what loan program are they quoting? Most borrowers want a conventional, fixed 30 year loan. They may be quoting a 15 year note, which would be lower. There’s a lot of fine print here.
OK, now the other issue is how often does the online lender update rates. Rates can sometimes change several times per day, for better or worse. Rates have a tendency to go up faster than they go down. So if they are offering a 4.5% rate and that was what they could offer last week, then you may be wasting your time.
Another issue with some of the “low rate” online lenders is their fees. There can be a trade off between rate and fees. If your goal is a low rate and you don’t mind paying higher fees, then that may be OK for you. Whoever you end up using for your loan, you should take this into account and request a Good Faith Estimate. If you are a “perfect” borrower and have an ideal loan scenario, and require little or no service, you may be able to get a better deal from an online lender.
OK, now let’s talk about offline. When you talk to a loan officer, he is going to be more aware of current rates and will get enough information from you to make sure he/she is giving you a “real world” quote that will apply to your loan scenario. He/she’s going to factor in your credit score, loan to value ratio, and other factors that may impact your rate.
In addition, if you are dealing with a broker, he/she is going to be able to shop your loan for you at multiple lenders to find the best rates and/or lowest fees, as opposed to a one size fits all approach that is more common with a bank or online lender. The other factor that you should take into account is service. Unless you are a “perfect” borrower and have an ideal loan scenario, you are generally going to get more service from a flesh and blood loan officer, versus a voice on the phone. It is simply a matter of getting what you pay for and need to meet your mortgage needs.