Comparing mortgage estimates is crucial to securing the best possible home loan. Understanding how to effectively evaluate these estimates can save you thousands of dollars over the life of your loan. This guide will walk you through a step-by-step process on How To Compare Mortgage Estimates, ensuring you make an informed decision.
Key Factors to Compare in Mortgage Estimates
When comparing loan estimates from different lenders, focus on these critical components:
Loan Amount, Interest Rate, and Monthly Payments
- Loan Amount: Verify the loan amount offered by each lender aligns with your needs.
- Interest Rate: Compare interest rates carefully, as even small differences can significantly impact your total cost. Remember that interest rates fluctuate daily. For adjustable-rate mortgages (ARMs), pay close attention to the worst-case interest rate scenario.
- Monthly Principal and Interest Payment: This is the core of your monthly payment and will vary based on the loan amount and interest rate.
- Monthly Mortgage Insurance Payment (if applicable): If your down payment is less than 20%, you’ll likely need mortgage insurance. Compare these costs across lenders.
- Total Monthly Payment: This includes principal, interest, mortgage insurance, and escrow payments for property taxes and homeowner’s insurance.
Upfront Costs, Lender Credits, and Cash to Close
- Upfront Loan Costs (Closing Costs): Scrutinize origination charges, appraisal fees, and other lender fees detailed in Section D of the Loan Estimate.
- Lender Credits: Look for lender credits in Section J, which can help offset your closing costs.
- Cash to Close: This is the total amount you’ll need to bring to the closing table, typically paid with a cashier’s check or wire transfer.
Five-Year Cost of Borrowing
Calculating the five-year cost of borrowing helps you compare the long-term financial implications of each loan offer.
- Find the “In 5 Years” section on page 3 of the Loan Estimate.
- Subtract the principal paid off from the total amount paid to determine your five-year cost (interest and fees). Remember that this calculation for ARMs assumes a fixed interest rate.
Negotiating and Avoiding Pitfalls
Negotiate for the Best Deal
Don’t be afraid to negotiate with lenders. Use competing Loan Estimates as leverage to secure a better interest rate or lower fees.
Understand “No Closing Cost” Loans
Loans advertised with “no closing costs” often have higher interest rates or rolled-in fees, resulting in higher monthly payments.
Watch for Warning Signs
Discrepancies between your initial discussions with a loan officer and the Loan Estimate warrant further inquiry.
Focus on Lender-Controlled Costs
When comparing Loan Estimates, concentrate on costs within the lender’s control, such as origination charges and lender credits. Factors like property taxes and insurance are generally outside the lender’s purview.
Conclusion
By carefully comparing mortgage estimates and understanding the key components, you can confidently choose the loan that best suits your financial situation. Don’t hesitate to ask lenders questions and negotiate for the most favorable terms. A thorough comparison will empower you to make an informed decision and save money over the life of your mortgage.
