When you are shopping for a loan, it is common to apply with several lenders. This gives you the opportunity to get the best deal available. Every lender has its own requirements regarding the loan programs that it offers and no two lenders typically have identical requirements even for the same program. It is not typical to find two lenders that offer the same deal. This is why it pays to shop around with different lenders, but you need to know what you are comparing in order to truly evaluate your options.
Every lender charges a different price for particular interest rates. These prices also change on a daily basis. When you are quoted a particular interest rate by a lender, you should ask whether or not that rate costs any points. If it does cost points, it essentially means that you are paying up front for a lower interest rate. If you do not wish to pay discount points, you can ask the lender what the rate would be with “zero points.” These points will be documented on the Good Faith Estimate that the lender is required to send you within 3 days of your loan application too. This allows you to truly compare loans from several lenders, by comparing not only the interest rate, but the discount points being charged.
Origination or Processing Fees
Discount points are directly tied into your interest rate, but origination fees are not. These fees are typically charged for the work that is involved in processing your loan. Some lenders place all of their fees into one fee, calling it the origination fee. Other lenders try to break the fees up on the Good Faith Estimate, making it look like the loan costs less than it does. As you look at the Good Faith Estimate, look for fees with names like, processing fee; rate lock fee; application fee or underwriting fee. These are all fees charged by the lender and should be totaled in order to compare the fees charged by different lenders.
Fees Charged by Others
In addition the fees charged by the lender are those charged by third parties that are involved with your loan. Your Good Faith Estimate will have estimates of these charges, allowing you to compare the costs of each lender. Most lenders have an appraiser and title company that they regularly with for every loan, which allows them to estimate the costs of your loan even before you get started. These fees are not generally negotiable, but you can opt to use the lender that uses services with lower fees if costs are a concern for you.
The Bottom Line
Figuring out which loan is a better deal for you can take quite a bit of work on your part. Rather than just taking the loan with the lowest interest rate, it is to your benefit to analyze every aspect of the loan. As you compare the interest rates and charges, you should keep in mind what you plan on doing with the home that you are planning to purchase. If it is not going to be a home that you will be in for the long-term, you might want to pay a higher interest rate and lower closing costs. On the other hand, if you will be in the home for the foreseeable future, it makes more sense to shop around, finding the lowest interest rate, even if it means that you must pay higher closing costs and/or discount points in the end. The most important thing to remember is to compare “apples to apples.” Comparing two loans without understanding how the Good Faith Estimate works will not allow you to truly compare the real price of the loan.
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