Buying a mortgage isn't much different from buying toilet paper, a can of soup, or a car. Think of a mortgage as a thing you can hold in your hand. When you compare cans of soup at the Commissary, you compare the size, the taste, and maybe look at the ingredients: carrots, potato starch, onion power, disodium guanylate (what is that, anyway?). So do the same thing with mortgages — the three primary ingredients to look for are: rates, fees, and service.
Assuming you know the loan type and amount you're looking for, you're ready to shop rates and fees. Mortgage companies charge "points": one point is 1 percent of the loan amount. The "origination point" is almost always 1 percent and that's the lenders profit. "Discount points" are the points charged to lock in a certain interest rate for a period of time. You are, in essence, buying a commitment from the mortgage company to close your loan at that interest rate.
Points change every day and fluctuate with the stock market. A poor Dow Jones usually means improved mortgage rates. The rule of thumb is: If you can happily live with the rate and point quote, lock in and don't look back. Unless you're investment savvy (and even the experts are having trouble nowadays), the market can flip either way, costing you a great lock-in opportunity. For market commentary, check out MonsterMoving.com, and get great commonsense advice at The Motley Fools Home Center.
You can almost always negotiate discount points. Lenders publish their quotes for the day in-house, and that's the price the loan officer is supposed to sell to make a basic commission. You probably won't be allowed to see the rate sheet, but ask. Loan officers are paid "overage" on the excess discount points the borrower pays. It's both fair and civilized to ask the loan officer how they are compensated.
How do you know you're getting a good deal? Have a friend call the mortgage company anonymously and ask for today's quote. Compare their offer with yours. Also, try calling around before you lock in. You want the mortgage companies to be competing for your business, so let them know what kind of deal their competitors are offering you and ask if they can beat it.
Make sure you're comparing apples to apples. Check out the Federal Trade Commission's online guide, Looking for the BEST Mortgages for more condensed information on different types of loans and rates. You pay for the rate you buy, so a "zero points" loan means you are buying a higher interest rate, or not paying for a lower interest rate.
Negotiate Those Fees
Fees are also negotiable. Veterans Administration (VA) loans and Federal Housing Authority (FHA) loans dictate what fees are allowed and how much they can be. These authorities protect borrowers and act as watchdog groups against excessive charges. Conventional loans (see Fannie Mae and Freddie Mac) allow other fees, such as application, underwriting, and processing fees, which may or may not be expenses incurred by the mortgage company.
Question these fees, ask that they be dropped or reduced, and look carefully for other "junk fees," such as warehousing and documentation fees and ask that they be dropped also. Be sure to ask if fees are refundable. Compare the annual percentage rate (APR), which calculates how much you actually pay once all these fees are added in.
The loan officer's responsibility includes collecting documents for underwriting, ordering the appraisal, submitting the loan, locking in the loan rate, and then, hopefully, telling you the loan was approved. A good loan officer will have a plan of action to combat any poor credit or income verification issues.
Some lenders offer automated underwriting, done by a computer, that's very fast and efficient. Other lenders offer on-site underwriting, which means the loan officers are probably on a first-name basis with the underwriter. Others may have to use off-site underwriting and may not know the underwriter at all. This is generally the slowest process, but can be most helpful if a particular underwriter has wider guidelines or tends to be more lenient.With a little homework, you can end up with a satisfying mortgage that fulfills your appetite for a new home, and leaves you with a good aftertaste.