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mortgage shopping for better rates

Mortgage Shopping for Better Rates

Lower rates on mortgage loans not only help you amortize your loan faster you will also have a lower monthly payment. A $250,000 mortgage at 4.5% for 30 years will have a $1,266.71 combined monthly payment.  At 4%, the same loan will have $1,193.54 combined monthly payment saving you $73.18 a month and at the end of five years, the unpaid balance would be $1,776 lower.

The credit score of the borrower often determines how mortgage lenders price their mortgage rates. The higher your credit score, the lower the mortgage rate you can get. Inversely, the lower your credit score, the higher the risk to the lender and therefore the higher the rate required to offset the risk.

For this reason, Realtors® recommend that you get pre-approved for a mortgage loan before you start looking for a home. This gives you the rate available to you based on your credit score. By getting the pre-approval, the lender can verify your credit, income and your ability to repay the loan. You will usually only get charged the cost of the credit report for being pre-approved. Pre-approval is not the same as pre-qualification. Pre-qualification is just the lenders opinion on what you can afford without the in-depth analysis.

When you are shopping mortgages with several lenders, the credit bureaus will count them as one inquiry if they are done within a two-week period. At this time, please restrain yourself from applying for other credit like cars, furniture or credit cards until after you have officially closed on your new home. These extra inquiries will affect your credit score in a negative way.

The Consumer Financial Protection Bureau recommends that you let lenders know that you are shopping the mortgage for the best rate and fees.

Start with recommendations from your Realtor® instead of searching the internet for mortgage lenders. Realtors® see the good, the bad and the ugly and will save you time and headache. Or if you have a friend who recently bought a new home you can get a referral.

Remember that lenders will bait unsuspecting borrowers with lower rates and fees. Once they get you to make an application, they allow critical time to lapse and now suddenly you have to settle for a different loan product. This usually makes borrowers feel they don’t have any choice but to accept the alternative.

Another point of confusion is how lenders will price loans to the public. They are usually quoting their best rates and in the fine print is the amount of points you will have to pay to get that rate. A point is one percent of the amount borrowed.  An example would be a quote for a loan at 4.5% with 1 point or at 4% with 2.5 points.

The points combined with the rate affect the yield the lender will earn, and you will pay.  A simple way to make this an apple to apple comparison is to have the lender quote the loan as a “par-value” loan with no points involved.  Then, the lowest rate will produce the lowest cost to you.

Another way to compare loans will be to use my financial app “Will Points Make a Difference.”  You can plug in the rate and points to calculate the lowest yield over a projected holding period or the full term. Click on the title to use the app.

Lenders usually make it very difficult for you to compare loans. Mortgage money is a commodity and shopping will be worth the effort.

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