Understanding how to compare loan offers is crucial for securing the best possible financing. This guide provides a detailed breakdown of the key factors to consider when evaluating different loan options.
Key Loan Comparison Factors
Comparing loan details allows you to identify the most advantageous offer. Utilize a Loan Estimate Explainer to decipher each offer’s implications. Here’s what to focus on:
- Loan Amount: The total amount you’re borrowing. This should align with your financial needs.
- Interest Rate: A lower interest rate translates to lower overall borrowing costs. Rates fluctuate daily, so compare estimates issued on the same day for accuracy. For adjustable-rate mortgages (ARMs), consider the worst-case scenario for potential rate increases.
- Monthly Principal & Interest: This is your core monthly payment towards reducing the loan principal and paying interest.
- Mortgage Insurance (If Applicable): This added cost protects the lender if you default. Compare premiums and factor them into your monthly expenses.
- Total Monthly Payment: This encompasses principal, interest, mortgage insurance, and escrow payments (property taxes and homeowner’s insurance).
- Upfront Loan Costs: Located on page 2, Section D of the Loan Estimate, these include origination charges and other fees.
- Lender Credits: Rebates offered by the lender to offset closing costs (page 2, Section J).
- Cash to Close: The total amount you need to bring to the closing, typically via cashier’s check or wire transfer (page 2).
Comparing Upfront Lender Costs
Focus on lender-specific fees when comparing closing costs:
- Total Origination Charges (Section A): Fees charged by the lender for processing the loan.
- Services You Can Shop For (Section B): Costs for services like appraisals and title insurance, where you can compare providers.
- Lender Credits (Section J): Rebates that reduce your closing costs.
Calculating Your Five-Year Cost of Borrowing
Determine the total interest and fees paid over five years:
- Locate the “In 5 Years” line on page 3 of the Loan Estimate. This section details total payments and principal paid off in five years.
- Subtract the principal paid from the total payments to find the total interest and fees. This represents your five-year cost of borrowing.
- Note: For ARMs, this calculation assumes a fixed interest rate. Actual costs could be higher if rates rise.
Confirming Loan Options and Negotiating
Ensure the loan aligns with your needs and negotiate for the best deal:
- Verify Loan Terms: Confirm the loan option and any points or credits match your expectations. Request adjustments if needed.
- Negotiate: Leverage competing Loan Estimates to negotiate better terms. Lenders often match or beat competitor offers.
Understanding Lender-Controlled Costs
Focus your comparison on costs within the lender’s control:
- Escrow for Taxes and Insurance (Page 1): While these amounts can vary slightly, significant discrepancies warrant inquiry.
- Taxes and Government Fees (Page 2, Section E): These should be consistent across lenders.
- Prepaids (Page 2, Section F): Costs like prepaid interest should be similar.
- Initial Escrow at Closing (Page 2, Section G): This amount should be comparable.
Avoiding Common Pitfalls
Be aware of potential misleading offers:
- “No Closing Costs” Loans: These often involve higher monthly payments to compensate for waived upfront fees.
- Discrepancies Between Verbal Agreements and Loan Estimates: Significant differences warrant clarification and potentially choosing a different lender.
By diligently comparing loan offers using these guidelines, you can make an informed decision and secure the most favorable loan terms.
