It may sound really easy to figure out mortgage loan companies, but the task is more formidable than most people expect. As you shop for your loan you may come across terms such as ARM, fixed rate loan, balloon mortgage, points, lock-in period, closing cost, prime rate, and others. It’s crucial to not only know what those terms represent but to apply them to lenders. Rating mortgage companies means finding out what they are offering as a complete package and not just the interest rate. Mortgage companies don’t operate solely by the prime rate; some have all kinds of fees that configure into the final loan. Lastly, if you apply at numerous places, your credit gets marked with that application as “open” which in turn adversely affects your credit score; which leads to higher fees and interest rates. Confused already? Don’t worry; I’ll briefly explain how to compare mortgage rate companies in this article.
When considering mortgages consumers often are quoted with different terms. It’s essential to work out spreadsheets for all kinds of variables, not just one type of loan. While you may be able to afford a 30-year term on a $200,000 home at one lender, you may not be able to afford it at another. Why is that? Because the points (percentage of upfront costs added onto the mortgage) may add too much to the final cost of the loan. Sometimes brokers or lenders add on a 1-2% of the total loan amount as a fee. They call these fees “points”. Points are added to the loan total and should factor into the decision to go with a specific lender.
Closing costs are another factor to consider when choosing a lender. Many people don’t realize that lenders do a lot of different things when you sign with them. They take care of the title and escrow; they set up the records with the government and transfer all kinds of monies and papers between banks, the Realtor, and other people involved in the loan process. These fees are included in the closing costs of the mortgage. You can, of course, choose to do many of the processes yourselves and require that the lender remove closing costs associated with the items you do yourself. However, many lenders will avoid this because of litigation concerns. That can be an important factor in considering which mortgage companies you want to work with.
Every type of loan has a variable, fixed, or balloon rate. Variable rates are called ARM loans, which stands for “adjustable-rate mortgage”. This means that during the life of the loan the interest rate can fluctuate. Different ARMs fluctuate depending on the terms of the loan. This means you can get an interest rate locked in for a period of time on an ARM and then the interest rate goes to the prime rate (or a specific rate stated on the loan at the time of inception). ARMs are generally the lowest interest rates.
Fixed-rate mortgages are the opposite of ARMs. They have a fixed interest rate for either the life of the amortization (the schedule made to pay off a loan). Fixed rates are generally much higher than variable rate loans. “Lock-in” rates are are fixed and cannot be changed during the lifetime of the loan.
A balloon mortgage is one in which the entire loan is paid off at a certain date. This ranges anywhere from 3 – 10 years and are great for people that a) buy commercial property b) expect to renegotiate a loan within that time period or c) are flipping houses (buying, fixing up, and reselling immediately).
Finding out how to rate mortgage companies is easy if you’re prepared to do all the calculations. Be sure to talk to all lenders and get their rates on every type of loan. While you may think a fixed rate loan sounds great from one lender, the same rate/closing costs/points may be less at another. Make sure you compare the rates and fees at one lender with the same rates as another. Meaning a 6% interest rate at one bank may cost you $3000 in fees, but at another lender, a 6% rate will cost you $2500 in fees. However, the first bank may have a better variable rate than the second bank. In other words, compare horses to horses and not horses to zebras!