How I Shopped for My Mortgage
When you are looking to buy a home, it’s important to treat the process of finding a mortgage like any other shopping trip. You want to find a mortgage in your price range, one that fits you well, and preferably one that’s on sale. Below are the steps that I took to find the right mortgage for my situation.
Know Your Credit Score
The banks and mortgage brokers will be using your credit score, at least in part, to determine the interest rate that they’ll charge you. By knowing your score, you’ll be armed with the same information that they have, and you will be in a better position to negotiate.
Know Your Rate
Knowing your credit score leads directly into this next point. Based on your score, you should be able to get a good idea of the rate that you can expect. I like to follow the average rates for the different loan types, which tend to be printed in the business sections of most newspapers on at least a weekly basis. While your credit score will affect whether you get a better or worse rate than the average, you can use the average as a starting point for determining what your rate will be.
Know Your Options
Even without getting into the exotic loans that have been making the news lately, there are still many different types of mortgages out there. The main decisions that you will have to make are whether to go with a fixed or adjustable rate loan and the length, or term, of your loan. Avoid negative amortization schemes, and watch out for loans with terms that look too good to be true.
Negotiate with Multiple Sources
This is perhaps the most important step that I took when finding my mortgage. By applying with more than one funding source, you get validation of the rates that each is offering you. If one offers a better rate, you’ll have instant negotiating leverage to try for a better rate with the others. If all of the rates are the same, then you can use the company that you feel most comfortable with. A good mortgage broker can help you through this process.
Evaluate the True Cost of the Loan
The cost of your loan is determined by more than just the interest rate. Other costs and credits, as well as your personal situation, will determine which loan is the most cost effective for you. In my case, I went with a slightly higher interest rate from the lender that was offering to pay for more of my closing costs. Knowing that I was going to pay my loan off early, I calculated the total cost of each option and found that the savings in closing costs outweighed the marginally higher rate.
The day may come when the home mortgage market is revolutionized by a P2P lender like Lending Club. Until that time comes, and we are forced to use traditional lending sources, I hope that my method of shopping for a mortgage provides some ideas that can save you money as well.