EDITORIAL
The Quest for the Perfect Loan
August 14, 2006 
 

Many of us have been on the quest for the perfect home. We can see the house perfectly in our imagination – the color, the kitchen window, the garage space, that spacious walk-in closet. We can envision entertaining in it, holding family gatherings, seeing our kids enjoying the backyard. And when it comes time to purchase a new home, we spend hours comparing properties, negotiating prices, and strategizing on how to win the contract. But how many of us have ever been on the quest for a perfect loan?

When it comes to buying a home – whether it be a starter condo, an upgrade for the new family, or a downsize for easy retirement living, the search for the perfect loan may be just as important as the search for the perfect home. It’s not quite as exciting to compare interest rates as it is to compare floor layouts. In fact many of us spend more time reviewing paint colors than we do negotiating closing costs, but for those that do look for the best loan, it can bring significant savings and valuable peace of mind.

Shopping around for a home loan or mortgage will help you to get the best financing deal. A mortgage—whether it's a home purchase, a refinancing, or a home equity loan—is a product, just like a car, so the price and terms may be negotiable. You'll want to compare all the costs involved in obtaining a mortgage. Shopping, comparing, and negotiating may save you thousands of dollars. The Federal Trade Commission offers several important tips to keep in mind when learning to be a pro at home-buying:

1 - Obtain Information from Several Lenders

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 you're 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 broker's 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.

2 - Obtain 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. Simply knowing 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:

Rates - 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.

Fees - A home loan often involves many fees, such as loan origination or underwriting fees, broker fees, as well as 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 rates.

3 - Obtain the Best Deal That You Can

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.

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. You'll 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. There's 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.

For more information on home buying visit the Federal Trade Commission at www.ftc.gov/ftc/consumer.htm and the Department of Housing and Urban Development at www.hud.gov/consumer/index.cfm. When buying a home, remember to shop around for loans, comparing costs and terms, and negotiating for the best deal. Don't 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 – after all, finding a great loan is just as important as finding a great home.