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How to Compare Loans Among Different Lenders?

Mortgage Library: Shopping for a Mortgage: How to Compare Loans Among Different Lenders?

Comparing loans of different lenders is often the most difficult part of mortgage shopping. Firstly, it is important to keep in mind that mortgage packages consist of more than interest rates. They consist of a quoted rate, points and closing costs.

Points are an up-front fee paid to the lender at closing. Each point equals one percent of the loan amount. Points are charged, or paid, to lower or increase the rate on the loan. Most lenders will allow you to choose amongst a variety of rate and point combinations for the same loan product. Therefore, when comparing rates of different lenders, make sure you compare also the associated points.

Closing costs typically consist of loan related fees, title and escrow charges, government recording and transfer charges and can add thousands of dollars to the cost of your loan. When comparing lenders it is important to compare loan related fees (i.e. the fees which lenders charge to process, approve and make the mortgage loan), since the other fees are typically independent of the lender.

Secondly, when comparing loans of different lenders you need to thoroughly investigate and compare all loan features: maximum LTV, mortgage insurance payments (if any), credit and cash reserve requirements, qualifying ratios, etc. Pay special attention to the presence of prepayment penalties and the availability and terms of conversion options (such as rate reduction option, or option to convert an ARM to a fixed-rate mortgage).

Thirdly, for each loan you are comparing find out the lock-in period, during which the interest rate and points quoted to you will be guaranteed. Lock-ins of 30, 45 and 60 days are common. Some lenders may offer a lock-in for only a short period of time (15 days, for example). Usually, the longer the lock-in period, the higher the price of loan. The lock-in period should be long enough to allow for settlement before lock-in expires.

Finally, make sure that you are comparing the interest rates on the same day. Rates change daily, if not a couple of times a day.

So, what is the best way to compare loans among different lenders?

First of all when you compare different lenders you should compare loan products of the same type (e.g. 30-year fixed). It does not make sense to compare different types of loan programs (e.g. 30-year fixed vs. 15-year fixed, or fixed vs. adjustable).

To compare loan products of the same type among different lenders:

1. Fix all lenders at one interest rate and lock-in period.

You have to compare different lenders on the same rate (e.g. 6.5%) and lock-in period, otherwise you will be comparing apples and oranges.

Most lenders can offer you a variety of rate and point combinations for the same loan product and allow you to choose the lock-in period.

2. Add up the total lender fees for that rate including points and loan related fees.

There are a number of different fees paid in connection with loan, and some lenders have different names for them. One lender might offer to waive one fee and then add another one. So when comparing loans of different lenders you should look at the total sum of ALL loan related fees.

These fees can include processing and underwriting fee, mortgage insurance premium, appraisal fee, the cost of a credit report, tax service fee, application, commitment, wire transfer fee, etc. Points can include discount and origination points and have to be converted into dollar amounts.

3. The lender that has lower lender fees has a cheaper loan than the lender with higher fees.

Example:

For a loan amount of 200,000 on a 30 year fixed rate mortgage:

Lender A is offering you a rate of 6.375% with 0 points, 6.25% with 0.5 points, and 6.125% with 1 points. He also charges $450 in loan related fees.

Lender B offers you 6.25% on the same loan with 0.375 points, 6.125% with 0.875 points, and 6.000% with 1.375 points and charges $680 in loan related fees.

Both lenders are quoting rates on a 45 day lock. Which lender has the better deal?

Lender A
Rate Points
6.125 1.000
6.250 0.500
6.375 0.000
30-Year Fixed Rate Mortgage

Loan Amount: $200,000

Lock-in Period: 45 days

Lender B
Rate Points
6.000 1.375
6.125 0.875
6.250 0.375
Loan Fees: $450 Loan Fees: $680

To get an interest rate of 6.125% lender A would charge you:

$450 + 1.000% * $200,000 =  $450 + $2,000 = $2,450

and lender B would charge you:

$680 + 0.875% * $200,000 = $680 + $1,750 = $2,430

So lender B probably has the better deal.


Related Articles:

How To Shop For a Mortgage
Information that will help you shop for a mortgage most effectively.
APR: A Common Way To Compare Mortgage Loans
The APR is commonly used to compare loan programs from different lenders. Unfortunately, the APR is not well defined and lenders calculate APRs differently.
Types of Mortgage Loans
Review characteristics of all the basic loan programs available today.
Closing Costs
A list of fees that you’ll have to make during the closing with brief explanations.

Government publications:

Using Ads to Shop for Home Financing
(FTC) Here are basic things you should know when comparing mortgage plans.
Where to Shop and What to Look For
(The Federal Reserve Board).
Consumer's Guide To Mortgage Settlement Costs
This brochure will give you detailed explanation of different closing costs, so you may find the entire settlement process far simpler than you might have imagined.
What Types Of Loans Are Available?


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