Shopping for a mortgage is like shopping for anything in your life. Everything is negotiable, including the terms, fees and prices. Look to reduce high-cost areas such as title insurance that is the largest fee at closing.
There used to be a clothing store in New York which said “an educated consumer is our best customer.” This could not be more true when it comes to mortgages. Now let’s get ready to save some money.
Visit Several Types of Mortgage Lenders
All mortgage companies are not the same. There are credit unions, firms that write mortgages, brokers that represent multiple companies and, of course, commercial banks. It pays to visit each one. The person you meet when visiting each company is a sales person that is likely working on commission.
Brokers are not obligated to get you the best rate unless they specifically have contracted to act as your agent. This is the first question you should ask. That said, they only make a commission if you buy from them, so they are under some pressure to get you the best deal. Do not be shy and let them know that you are shopping for the best combination of terms and rates.
Sometimes it is not straight forward if you are with a lender or a broker. Get a clear idea of all fees since brokers sometimes are paid by adding additional “points” (part of the upfront payment) you make.
Mortgage Fee Checklist
To compare mortgages line up the following fee checklist:
- Interest Rates
- Fixed or Adjustable (an interest rate that can change over the course of the loan)
- APR (summary number that includes the interest rate and all fees)
- Points – points are paid as a type of down payment to lower the size of the loan. If you pay more points, you can lower the interest rate in exchange for paying now instead of later as part of the mortgage payment stream. This is how you can “buy down” the interest rate to a lower number. Points also can mask fees or commissions being paid to the person selling you the loan. They deserve to make a profit, so it is not necessarily a bad thing. You would gladly pay a higher commission in exchange for a significantly lower mortgage.
- Fees – get an estimate for each of these. Not every fee is charged, and some can be combined into one number.
- Loan origination
- Closing Costs
- Down payments
- PMI – mortgage insurance if you put down less than 20%. Some government loans such as FHA may not require PMI for lower down payments.
Check with Your Attorney or Financial Planner
Consult with your estate planning attorney or financial planner when structuring a mortgage. They can provide valuable insight into the tax and estate implications of the mortgage. This is particularly important for homes purchased by high net worth individuals or homes that are a gift for a family member.
Mortgage Buyers Checklist
Use the following checklist worksheet to compare mortgages:
- Type of Mortgage (FHA, fixed, adjustable, conventional)
- Minimum down payment
- Length of the Loan (loan term)
- Interest Rate
- Loan Points (may be called loan discount points)
- PMI (mortgage insurance)
- How long do you need to keep PMI insurance
- Costs for taxes
- Required insurance such as hazard insurance
- Estimated payment (Principal, Interest, Taxes, Insurance, PMI)
- Misc. Fees (loans may differ or combine)
- Credit Report
- Funding or Lender
- Recording or Preparation
- Title search and/or Title Insurance
- Prepaid Expenses
- Taxes (local, state, stamp)
- Escrow requirements
- Flood zone requirements
- Home inspections
Questions to Ask Before You Sign
Here is a list of questions to ask each broker or lender when shopping for a mortgage.
- Can any of the fees be waived? If yes how.
- Are there any mortgage prepayment penalties?
- If yes, how much?
- Is the prepayment penalty period limited?
- Can you prepay principal?
- Can you lock in the interest rate (keep the rate you are quoted in place until you close the mortgage)?
- Is there a charge to lock in the interest rate?
- When does the interest rate lock-in start?
- What if the interest rate goes down, can you remove the lock-in?
- If an adjustable rate mortgage, how frequently and by how much can the rate increase?
- What is the potential change to the monthly payment?
- How is the rate determined? (what index is it tied to?)
- How is the rate determined in combination with the index (does the lender add fees or a margin to the interest rate?)
- What is the history of the index moving, and how much does it move?
- Is credit life insurance required?
- If yes, is it built into the price of the mortgage or is it an additional charge?
- If no, can you buy it from the lender and how much will it cost?
Tips for Reducing Mortgage Closing Costs
- Do not let the process manage you: Approval and other dates can be important with interest rate lock-ins at risk. Do not solely rely on the lender to move things along. If deadlines are not being met, take action and call yourself. Keep on calling until action is taken. Take names and get firm delivery date commitments.
- Do not completely rely on referrals from your real estate agent or bankers: You have the right to choose your mortgage providers. Compare rates from lenders suggested by lawyers, accountants and realtors with rates you can get yourself from different types of thrifts.
- Do not give in: If you feel you are not getting the best rate or the right answers, take a break and seek advice from another lender.
- Shop for title insurance: The #1 closing cost is title insurance and is a one-time charge at closing. Title insurance is required by most lenders to ensure that a property is free of liens and tax liabilities. Properties that have changed hands multiple times need to be checked for problems.Title insurance comes in two forms. A lender’s policy is what is usually mandated by the lender. The size of the policy declines as you pay off the mortgage. Features are based on standards set by either the state land title association or the American Land Title Association (ALTA). The other kind of title insurance is designed to protect the owner. This type of insurance protects the equity you have in your home.By shopping around it is possible to save 30% or more by comparing title insurance companies. Ask if your lender, lawyer or real estate agent has a financial interest in the recommended firm. This is a red flag that should compel you to shop around. A list of title insurance companies can be found by visiting the Demotech website. Expect to pay around $1K for a title insurance policy that applies to a $250K mortgage or $2K for a $400K mortgage.Title insurance companies also offer what are called “enhanced” policies that include coverage for problems such as:
- A mechanic’s lien for work on the property before your purchase date
- Coverage for any zoning issues that can affect the existing structure
- Coverage if you need to remove any structures that do not have a proper zoning variance or certificate of occupancy
Last, check with friends and trusted advisers for referrals. Be sure to check mortgage reviews at the BBB and other valuable third part sites.