How to Compare Mortgage Options
When purchasing a home, or refinancing your residence, a borrower should consider mortgage options from at least three different lenders. While the monthly interest rate may look the same, the difference usually lies in the fees charged to the borrower. Through the use of a truth in lending statement and a good faith estimate, a borrower can find the cheapest overall mortgage option for him and his family.
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Instructions
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Ask each lender for a copy of the truth in lending statement and good faith estimate on your potential mortgage. The truth in lending statement outlines the APR (annual percentage rate) and the overall interest expense on the loan. The good faith estimate outlines and itemizes the fees associated with the loan. Both of these statements will adjust prior to closing, but will give you a good way to compare each option.
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Search the truth in lending statement for the mortgage's APR. It will be in the top box on the left hand side of the paper. The APR is a numerical representation of the entire cost of the mortgage, including one year's fees and your monthly interest rate. The mortgage with the lowest APR is the lowest cost mortgage, even if the monthly interest rate is lower on another loan. Sometimes, lenders charge borrowers for lower interest rates, and this fee is reflected in the APR.
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Read the good faith estimate for an outline of the fees associated with the loans. You may find that the difference in two mortgages may be due to the fact that the lender estimated your taxes and insurance expenses incorrectly--which is reflected in an inaccurate APR. Make sure you are comparing apples to apples when comparing good faith estimates. If there is a large difference in APRs, you are more than likely being charged "points" or a fee to reduce the monthly interest rate.
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Tips & Warnings
If you prefer a lender with a higher cost than another, show him the lowest cost mortgage option and ask him to match it. Many times, the lender will respond appropriately and allow you to get the better deal through him.
Keep your original truth in lending and good faith estimates and compare your original numbers with the final numbers to ensure that additional fees were not added to the loan after the fact.
