Shopping For The Best Home Loan Rate

A home loan or mortgage is a product, just like a car, so the price and terms may be negotiable. Shopping, comparing, and negotiating can net you the best home loan rate, and may save you thousands of dollars.

Home loans are available from several types of lenders - thrift institutions, commercial banks, mortgage companies, and credit unions. Different lenders may quote you different prices, so it's best to contact several lenders to make sure you’re getting the best home loan rate.

You can also get a home loan through a mortgage broker. Brokers arrange transactions rather than lending money directly; in other words, they find a lender for you. A broker’s access to several lenders can mean a wider selection of home loan products and terms from which you can choose.

Still, brokers are not obligated to find the best deal for you unless they have contracted with you to act as your agent. Consequently, you should consider contacting more than one broker, just as you should with banks or thrift institutions.

Brokers Mean Added Fees

Whether you are dealing with a lender or a broker may not always be clear. Some financial institutions operate as both lenders and brokers. And most brokers’ advertisements do not use the word "broker." Therefore, be sure to ask whether a broker is involved. This information is important because brokers are usually paid a fee for their services that may be separate from and in addition to the lender’s origination or other fees. A broker’s compensation may be in the form of "points" paid at closing or as an add-on to your interest rate, or both. 

Consider All Costs In Determining The Best Home Loan Rate

To get the best home loan rate, you’ll want to compare all the costs involved in obtaining a home loan. Knowing just the amount of the monthly payment or the interest rate is not enough. Ask for information about the same loan amount, loan term, and type of loan so that you can compare the information. The following information is important to get from each lender and broker:

Home Loan Rates

• Ask each lender and broker for a list of its current mortgage interest rates and whether the rates being quoted are the lowest for that day or week.
• Ask whether the home loan rate is fixed or adjustable. Keep in mind that when interest rates for adjustable-rate loans go up, generally so does the monthly payment.
• If the rate quoted is for an adjustable-rate loan, ask how your rate and loan payment will vary, including whether your loan payment will be reduced when rates go down.
• Ask about the loan’s annual percentage rate (APR). The APR takes into account not only the interest rate but also points, broker fees, and certain other credit charges that you may be required to pay, expressed as a yearly rate.

Loan Points

Points are fees paid to the lender or broker for the loan and are often linked to the interest rate; usually the more points you pay, the lower the rate.

• Check your local newspaper for information about rates and points currently being offered.
• Ask for points to be quoted to you as a dollar amount--rather than just as the number of points--so that you will actually know how much you will have to pay.

Loan Fees

A home loan often involves many fees, such as loan origination or underwriting fees, broker fees, and transaction, settlement, and closing costs. Every lender or broker should be able to give you an estimate of its fees. Many of these fees are negotiable. Some fees are paid when you apply for a loan (such as application and appraisal fees), and others are paid at closing.

In some cases, you can borrow the money needed to pay these fees, but doing so will increase your home loan amount and total costs. "No cost" loans are sometimes available, but they usually involve higher rates. Ask for an explanation of any fee you do not understand.

Down Payments and Private Mortgage Insurance

Some lenders require 20 percent of the home’s purchase price as a down payment. However, many lenders now offer home loans that require less than 20 percent down--sometimes as little as 5 percent on conventional loans. If a 20 percent down payment is not made, lenders usually require the home buyer to purchase private mortgage insurance (PMI) to protect the lender in case the home buyer fails to pay. When government-assisted programs such as FHA (Federal Housing Administration), VA (Veterans Administration), or Rural Development Services are available, the down payment requirements may be substantially smaller.

If private mortgage insurance (PMI) is required for your loan, make sure you understand what the total cost of the insurance will be, how much that will impact your monthly payment, and how long you will be required to carry the insurance.

Finally, don’t assume that minor credit problems or difficulties stemming from unique circumstances, such as illness or temporary loss of income, will limit your home loan choices to only high-cost lenders. If your credit report contains negative information that is accurate, but there are good reasons for trusting you to repay a loan, be sure to explain your situation to the lender or broker. If your credit problems cannot be explained, you will probably have to pay more than borrowers who have good credit histories. But don’t assume that the only way to get credit is to pay a high price. Ask how your past credit history affects the price of your home loan and what you would need to do to get a better price.

Take the time to shop around and negotiate the best deal that you can.

Credits: Department of Housing and Urban Development