All Important Cost Information
Be sure to get information about mortgages from several lenders or brokers.
Know how much of a down payment you can afford, and find out all the
costs involved in the loan. Knowing just the amount of the monthly
payment or the interest rate is not enough. Ask for information
about the same loan amount, loan term, and type of loan so that you
can compare the information. The following information is important
to get from each lender and broker:
- Ask each lender and broker for a list of its
current mortgage interest rates and whether the rates being
quoted are the lowest for that day or week.
- Ask whether the rate is fixed or adjustable.
Keep in mind that when interest rates for adjustable-rate loans
go up, generally so does the monthly payment.
- If the rate quoted is for an adjustable-rate
loan, ask how your rate and loan payment will vary, including
whether your loan payment will be reduced when rates go down.
- Ask about the loans annual
percentage rate (APR). The APR takes into account not only
the interest rate but also points, broker fees, and certain
other credit charges that you may be required to pay, expressed
as a yearly rate.
Points are fees paid to the lender
or broker for the loan and are often linked to the interest rate;
usually the more points you pay, the lower the rate.
- Check your local newspaper for information about
rates and points currently being offered.
- Ask for points to be quoted to you as a dollar
amount--rather than just as the number of points--so that you
will actually know how much you will have to pay.
A home loan often involves many fees, such as loan
origination or underwriting fees, broker fees, and transaction,
settlement, and closing costs. Every lender or broker should
be able to give you an estimate of its fees. Many of these fees
are negotiable. Some fees are paid when you apply for a loan (such
as application and appraisal fees), and others are paid at closing.
In some cases, you can borrow the money needed to pay these fees,
but doing so will increase your loan amount and total costs. "No
cost" loans are sometimes available, but they usually involve higher
- Ask what each fee includes. Several items may
be lumped into one fee.
- Ask for an explanation of any fee you do not
understand. Some common fees associated with a home loan closing
are listed on the Mortgage Shopping Worksheet in this brochure.
Down Payments and Private Mortgage
Some lenders require 20 percent of the homes purchase price
as a down payment. However, many lenders now offer loans that require
less than 20 percent down--sometimes as little as 5 percent on conventional
loans. If a 20 percent down payment is not made, lenders usually
require the home buyer to purchase private mortgage
insurance (PMI) to protect the lender in case the home buyer
fails to pay. When government-assisted programs such as FHA (Federal
Housing Administration), VA (Veterans Administration), or Rural
Development Services are available, the down payment requirements
may be substantially smaller.
- Ask about the lenders requirements for
a down payment, including what you need to do to verify that
funds for your down payment are available.
- Ask your lender about special programs it may
If PMI is required for your loan,
- Ask what the total cost of the insurance will
- Ask how much your monthly payment will be when
including the PMI premium.
- Ask how long you will be required to carry PMI.
Obtain Information from Several
Home loans are available from several types of lenders - thrift
institutions, commercial banks, mortgage companies, and credit
unions. Different lenders may quote you different prices, so you should
contact several lenders to make sure youre getting the best
price. You can also get a home loan through a mortgage broker.
Brokers arrange transactions rather than lending money directly; in
other words, they find a lender for you. A brokers access to
several lenders can mean a wider selection of loan products and terms
from which you can choose. Brokers will generally contact several
lenders regarding your application, but they are not obligated to
find the best deal for you unless they have contracted with
you to act as your agent. Consequently, you should consider contacting
more than one broker, just as you should with banks or thrift institutions.
Whether you are dealing with a lender or a broker may not always
be clear. Some financial institutions operate as both lenders and
brokers. And most brokers advertisements do not use the word
"broker." Therefore, be sure to ask whether a broker is involved.
This information is important because brokers are usually paid a
fee for their services that may be separate from and in addition
to the lenders origination or other fees. A brokers
compensation may be in the form of "points" paid at closing or as
an add-on to your interest rate, or both.
You should ask each broker you work with how he or she will be compensated
so that you can compare the different fees. Be prepared to negotiate
with the brokers as well as the lenders.
Obtain the Best Deal That
Once you know what each lender has to offer, negotiate
for the best deal that you can. On any given day, lenders and brokers
may offer different prices for the same loan terms to different consumers,
even if those consumers have the same loan qualifications. The most
likely reason for this difference in price is that loan officers and
brokers are often allowed to keep some or all of this difference as
extra compensation. Generally, the difference between the lowest available
price for a loan product and any higher price that the borrower agrees
to pay is an overage. When overages occur, they are
built into the prices quoted to consumers. They can occur in both
fixed and variable-rate loans and can be in the form of points, fees,
or the interest rate. Whether quoted to you by a loan officer or a
broker, the price of any loan may contain overages.
Have the lender or broker write down all the costs associated
with the loan. Then ask if the lender or broker will waive or reduce
one or more of its fees or agree to a lower rate or fewer points.
Youll want to make sure that the lender or broker is not agreeing
to lower one fee while raising another or to lower the rate while
raising points. Theres no harm in asking lenders or brokers
if they can give better terms than the original ones they quoted
or than those you have found elsewhere.
Once you are satisfied with the terms you have negotiated, you
may want to obtain a written lock-in from the
lender or broker. The lock-in should include the rate that you have
agreed upon, the period the lock-in lasts, and the number of points
to be paid. A fee may be charged for locking in the loan rate. This
fee may be refundable at closing. Lock-ins can protect you from
rate increases while your loan is being processed; if rates fall,
however, you could end up with a less favorable rate. Should that
happen, try to negotiate a compromise with the lender or broker.
Shop, Compare, Negotiate
When buying a home, remember to shop around, to compare
costs and terms, and to negotiate for the best deal. Your local newspaper
and the Internet are good places to start shopping for a loan. You
can usually find information both on interest rates and on points
for several lenders. Since rates and points can change daily, youll
want to check your newspaper often when shopping for a home loan.
But the newspaper does not list the fees, so be sure to ask the lenders
The Mortgage Shopping Worksheet that follows may also help you.
Take it with you when you speak to each lender or broker and write
down the information you obtain. Dont be afraid to make lenders
and brokers compete with each other for your business by letting
them know that you are shopping for the best deal.
Credit Problems? Still Shop,
Compare, and Negotiate
Dont assume that minor credit problems or difficulties
stemming from unique circumstances, such as illness or temporary loss
of income, will limit your loan choices to only high-cost lenders.
If your credit report contains negative information that is accurate,
but there are good reasons for trusting you to repay a loan, be sure
to explain your situation to the lender or broker. If your credit
problems cannot be explained, you will probably have to pay more than
borrowers who have good credit histories. But dont assume that
the only way to get credit is to pay a high price. Ask how your past
credit history affects the price of your loan and what you would need
to do to get a better price. Take the time to shop around and negotiate
the best deal that you can.
Whether you have credit problems or not, its a good idea
to review your credit report for accuracy and completeness before
you apply for a loan. To order a copy of your credit report, contact:
Equifax: (800) 685-1111
TransUnion: (800) 916-8800
Experian: (800) 682-7654
also known as variable-rate loans, usually offer a lower initial interest
rate than fixed-rate loans. The interest rate fluctuates over the
life of the loan based on market conditions, but the loan agreement
generally sets maximum and minimum rates. When interest rates rise,
generally so do your loan payments; and when interest rates fall,
your monthly payments may be lowered.
Annual percentage rate (APR) is the
cost of credit expressed as a yearly rate. The APR includes the
interest rate, points, broker fees, and certain other credit charges
that the borrower is required to pay.
Conventional loans are mortgage
loans other than those insured or guaranteed by a government agency
such as the FHA (Federal Housing Administration), the VA (Veterans
Administration), or the Rural Development Services (formerly know
as Farmers Home Administration, or FmHA).
Escrow is the holding of money or
documents by a neutral third party prior to closing. It can also
be an account held by the lender (or servicer) into which a homeowner
pays money for taxes and insurance.
Fixed-rate loans generally have repayment
terms of 15, 20, or 30 years. Both the interest rate and the monthly
payments (for principal and interest) stay the same during the life
of the loan.
The interest rate is the cost of
borrowing money expressed as a percentage rate. Interest rates can
change because of market conditions.
Loan origination fees are fees charged
by the lender for processing the loan and are often expressed as
a percentage of the loan amount.
Lock-in refers to a written agreement
guaranteeing a home buyer a specific interest rate on a home loan
provided that the loan is closed within a certain period of time,
such as 60 or 90 days. Often the agreement also specifies the number
of points to be paid at closing.
A mortgage is a document signed
by a borrower when a home loan is made that gives the lender a right
to take possession of the property if the borrower fails to pay
off the loan.
Overages are the difference between
the lowest available price and any higher price that the home buyer
agrees to pay for the loan. Loan officers and brokers are often
allowed to keep some or all of this difference as extra compensation.
Points are fees paid to the lender
for the loan. One point equals 1 percent of the loan amount. Points
are usually paid in cash at closing. In some cases, the money needed
to pay points can be borrowed, but doing so will increase the loan
amount and the total costs.
Private mortgage insurance (PMI)
protects the lender against a loss if a borrower defaults on the
loan. It is usually required for loans in which the down payment
is less than 20 percent of the sales price or, in a refinancing,
when the amount financed is greater than 80 percent of the appraised
Thrift institution is a general term
for savings banks and savings and loan associations.
Transaction, settlement, or closing
costs may include application fees; title examination, abstract
of title, title insurance, and property survey fees; fees for preparing
deeds, mortgages, and settlement documents; attorneys fees;
recording fees; and notary, appraisal, and credit report fees. Under
the Real Estate Settlement Procedures Act, the borrower receives
a good faith estimate of closing costs at the time of application
or within three days of application. The good faith estimate lists
each expected cost either as an amount or a range.