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How to Find the Best Home Loan Possible - 2007-05-05 |
If you're in the market for a new home, you're probably planning on borrowing some money. And once you've made a decision that you need a home loan of some amount, the next decision is a tougher one.
With literally thousands of lenders vying for your business, how can you find the best combination of rate and terms, and how do you know you can trust the lender you select?
First, let's tackle the issue of comparing offers.
In order to compare apples to apples, you will need to begin by selecting the category of loan you plan to seek. For example, do you want a fixed rate or an adjustable rate loan, and if you want a fixed rate, do you want a traditional thirty year term or a shorter fifteen year term?
My recommendation is that you begin the process by comparing the plain old thirty year fixed rate loan, because it is the most popular loan available in today's lending market. You can always look at other types of loans later.
Once you have selected your category, you should know that there are usually three variables that lenders can manipulate to try to make their particular program more attractive to borrowers:
* The INTEREST RATE is the annualized rate the lender will use to determine the amount of your interest expense each and every month. For example, if your interest rate was stated at 6.0% and your balance was exactly $100,000, then the interest expense for that particular month would be $100,000 times 6%, then divided by 12 months to equal exactly $500.
Any additional loan payment made during that month will be credited toward principal reduction. Remember that your monthly deposit of tax and insurance goes into an escrow account and is technically not part of your loan payment.
Also know that the APR or the so-called ANNUAL PERCENTAGE RATE that you see in large letters on disclosure statements is not the rate you will actually be paying. Instead, the APR is an attempt on the part of the government to force lenders to disclose all hidden interest costs. Unfortunately, it has confused far more consumers than it has informed.
* The SETTLEMENT COSTS are a bundle of expenses associated with the borrowing transaction that are traditionally considered a cost of the borrower. Actual expenses incurred by the lender include the attorney's fees, the loan origination fee, the appraisal, the underwriting costs, the costs of verifications, state intangibles tax, and delivery and recording fees. When you apply for a home loan, lenders are required to give you a list of all these fees, called a GOOD FAITH ESTIMATE.
Most lenders will provide you with a good faith estimate even before you formally apply, as a way of letting you know in advance what their cost structure includes. This allows you to compare costs between one lender and
another, keeping the amount of the loan constant.
Loan closing costs typically run between 2 and 3 percent of the loan amount, depending on the amount being borrowed. Thus, on a constant amount being borrowed, it becomes easy to compare costs between lenders and see who is charging how much for what.
Some lenders will try to trick borrowers into believing that they are somehow able to close a home loan with no closing costs whatsoever. The truth is that these lenders have raised the stated interest rate to allow them to sell the loan at a premium, and that's how they pay for your closing costs. In other words, your closing costs are built into the rate you are charged.
* LOAN DISCOUNT POINTS are a form of prepaid interest, which some lenders charge at closing. Each point equals one percent of the loan amount, and is paid up-front at the closing table. So if you borrowed $100,000 and agreed to pay 2 discount points, you would be charged $2,000 on the settlement statement for this prepaid interest.
By obtaining some of their interest in advance, lenders are able to offer you a lower interest rate over the life of your loan, a condition that some buyers find very attractive.
So, for example, a lender might offer you an interest rate of 6.25 percent with no discount points, and the same lender might also offer you a rate of 5.875 percent with two discount points. If your employer agreed to pay all closing costs and points up to a maximum of 5 percent, you would likely opt for the lower interest rate and higher points alternative.
Absent such a benevolent boss, most borrowers choose to borrow with zero discount points. Loans with no discount points are said to be "at par." In order to keep all our apples the same color, I recommend that you request all your good faith estimates be made at today's best rate "at par."
Next, let's talk about how to select the lenders you plan to survey.
I have a strong bias in favor of lenders who are physically located in your community and have a reputation for being a good corporate citizen. I believe it is very important that you meet face-to-face with the person who will be handling your loan application, and that you know exactly who to call if things don't work out as planned.
In my opinion, it's simply not worth the risk of losing the home you want in order to try and save a few bucks or a few hundredths of a percentage point on the rate. That rate is worth absolutely nothing if you can't close it, and that's exactly what happened to me a couple of years ago.
I'm sure somebody somewhere has nothing but good things to say about all the wonderful service they got from their close friend, the loan officer on the world wide web. But there are too many things that can go wrong, too many contingencies that need last minute attention, to leave this financial transaction to the vagaries of cyberspace.
My advice is to stick close to home. Ask people you trust who they recommend. Your neighbors, your banker, and your agent will likely have personal experiences they can share with you, and I advise you to listen.
Now that you understand the variables you are dealing with, here is the procedure I recommend.
On the day that you are ready to formally make loan application, call at least three or four reputable lenders and request a good faith estimate on the amount you need to borrow at today's best thirty year rate at par. Ask the lender to fax the good faith estimate to you as soon as possible. If they refuse, move to another lender.
Compare these estimates line by line, and feel free to ask one lender to match another's rate and terms. By doing this, you are most likely to get the best rate available that day, coupled with a written promise of reasonable closing expenses.
And perhaps best of all, you will be dealing with a reputable local lender who you can see in person.
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