You've requested several mortgage quotes and want to compare them to find your best mortgage deal. Although comparing rates is important when comparing different mortgage offers, you'll need to dig deeper to understand how mortgage quotes can differ. Here's what to look for:
- Fixed Mortgage interest rate: The interest rate, also called mortgage rate, represents an annual percentage of the loan amount. For example, if you borrow $200,000 at a fixed mortgage rate of 3.50 percent the annual amount of interest would be $7000. As you pay down a fixed rate mortgage, more of each payment is applied to the loan amount and less to interest. This process is called amortization.
- Adjustable mortgage rate: Adjustable rate mortgages provide an introductory fixed-rate term and convert to and adjustable rate mortgages after the introductory period expires. While introductory rates on adjustable rate mortgages are generally lower than market rates for fixed rate mortgages, the interest rate can vary when an adjustable rate mortgage becomes adjustable. When and by how much a mortgage becomes adjustable is determined by its adjustment period, the financial index used to calculate interest rate adjustments and the margin used by the lender. Adjustable rate mortgages are typically advertised as 1/1, 3/1. 5/1 or 7/1 adjustable rate mortgages. the first number indicates how long the introductory rate will last expressed in years. For example, a 5/1 adjustable rate mortgage has an introductory period of five years. The next number indicates how often a mortgage rate can adjust expressed in years. In the case of a 5/1 adjustable rate mortgage, the mortgage rate can adjust once a year after the introductory period expires. Mortgage lenders add a margin rate to the index rate in effect when a mortgage loan is made. If the index rate is 2.50 percent, and the lender's margin rate is 1.25 percent, the mortgage rate will be 3.75 percent until the next adjustment period. When comparing adjustable rate mortgage quotes, pay attention to which index is used and each lender's margin rates as these can vary.
- Discount points: Lenders may charge discount points to lock-in a favorable mortgage rate. Mortgage lenders typically advertise rock-bottom interest rates that are available only to borrowers with excellent credit, but they may also charge discount points, which add to the cost of a home loan. One discount point is equal to one percent of the mortgage amount. For a $200,000 mortgage, one discount point is equal to $2000.
- If you're not sure which type of mortgage you want, please request and compare multiple quotes for fixed and/or adjustable rate loans. Compare fixed rate quotes and adjustable rate quotes separately to find your best offer for each loan type.
- Lender fees: The Consumer Financial Protection Bureau advises against choosing a mortgage until you apply and receive a good faith estimate, which you will receive after applying for a mortgage. The good faith estimate includes estimated lender fees and costs along with estimated closing costs.
- Annual percentage rate (APR): The APR is a calculation of mortgage interest, loan fees, and costs expressed as a percentage of your mortgage amount. When comparing different mortgage offers, You can use the APR to compare like loans. For example, compare APRs for two 30-year fixed rate mortgage quotes or two 15-year fixed rate mortgage quotes, but APR won't work for comparing a 30-year loan to a 15-year loan or a 30-year fixed rate mortgage and a 30-year adjustable rate mortgage
When reviewing mortgage quotes, make note of questions and make sure each is answered to your satisfaction.
When Comparing Different Mortgage Offers: Tips for Successful Mortgage Shopping
- Compare and negotiate mortgage quotes. The Federal Trade Commission encourages consumers to negotiate with prospective mortgage lenders. While third-party fees such as appraisals and recording fees are non-negotiable, you can negotiate lender fees and discount points.
- Keep in mind that mortgage rates change and estimated fees and costs can also vary. It's a good idea to budget extra to cover changes or unexpected situations that can raise your costs.
- Go with your instincts: Choose a lender who is compatible with your style of doing business. If a loan officer is too busy to answer questions, or says "Let me handle it!" In response to your questions, keep shopping.
Comparing different mortgage quotes and following up with lenders requires work, but when you find the right loan and lender, you'll be on your way to financing your next home.