Compare A Minimum Of Five Lenders
Like with all significant purchases, it makes sense to comparison shop when you get a mortgage. When borrowers select a lender without comparing shopping they could end up paying thousands of dollars more in interest expense or closing costs than they should. There are different types of lenders such as banks, mortgage brokers, mortgage bankers and credit unions and they are ALL competing for your mortgage business. You should treat the mortgage process like you would any other major purchase, such as buying a car — shop around, compare mortgage proposals from multiple lenders and negotiate the best terms for your mortgage.
Although the mortgage process can be complicated and overwhelming, you are really focused on only two items when comparing mortgage proposals: the mortgage rate and closing costs. You can use lender competition to your advantage by potentially negotiating a lower interest rate or reduced closing costs. We recommend that you gather proposals from at least five lenders, including one mortgage broker, to make sure that you are getting the loan with the lowest interest rate and fees. Comparing at least five quotes ensures that you have a range of mortgage options, which puts you in a stronger position to negotiate.
Break Down Your Loan Estimate Form
The lender is required to give you theloan estimate form within three days of completing a mortgage application, but theres nothing keeping them from giving it to you sooner, so ask for it. This form includes an itemized list of costs, including your loan amount, interest rate and monthly payments. On page two it has a section called Services you can shop for, including:
- Pest inspection
- Fees for the title search and the settlement agent, and for the insurance binder
The vendors listed on the form could be your lenders preferred vendors, but youre not required to work with them, and your lender is also required to offer alternatives. You can shop around for lower-priced vendors for different services on your own however, if your independently-selected vendor changes its pricing before closing, youll be on the hook for any increase. If you choose a lender-provided vendor instead, its pricing isnt allowed to change by more than 10 percent from the original quote.
Additionally, if youre buying a home, note that the seller or sellers real estate agent might be the ones who chose the title and escrow provider. If you want to get new vendors in this case, youll need to negotiate the purchase agreement with the seller, not with your mortgage lender.
Ask A Bank Or Lender To Match Other Mortgage Offers
It’s important to note that those rate quotes can also serve a secondary purpose. Often, you can ask lenders to match other mortgage offers. If you choose to do so, having another rate quote available to serve proof that you were given a lower rate will give you more negotiating power.
However, in addition to negotiating your interest rate, you can also ask about the various fees that are being charged. While not all mortgage costs are negotiable, some have more flexibility. For example, while appraisal costs and title insurance fees are usually set in stone, youll likely be able to negotiate lender-specific fees like the application fee or origination fee.
Credible can help you compare lenders and mortgage rates from the comfort of your own home.
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How Much You Can Drop On Your Down Payment
If youâre ready to throw down 20 percent of the asking price on your new home, youâll likely have good mortgage options and greater flexibility. That said, the average American puts 11 percent down on their home, which is significantly less than the âstandardâ 20 percent. For buyers under the age of 35, that number drops to just 8 percent. So, donât be afraid if you canât pull together the full 20 percent of your homeâs purchase priceâyouâre in good company.
How much money you can afford to put down at closing, your employment history, and your net worth each play an important role in deciding whether or not you get approved for a mortgage. When you do get approved, theyâll also play a role in determining what the rates and conditions will be.
Hereâs a good example:
Letâs say youâre interested in a $100K, 30-year mortgage. If you have a credit score of 760 or above, youâll qualify for an interest rate of about 4.24 percent. But what if your score is 640 or below? Youâll probably be closer to an interest rate of 5.83 percent. While that may not sound like a big difference, it adds up. Take a look:
MORTGAGE 1: Credit score of 760+
Principal : $100,000
The total cost of mortgage: $211,896
Total interest paid: $111,896
The second mortgage costs $98 more per month â thatâs $1,176 per year. By the end of the 30-year repayment period, you will have spent $35,008 more on interest for your mortgage.
Thatâs a big difference.
Features You Want To See In Your Mortgage Contract In 2021
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Most Canadians who become homeowners typically need to take out a mortgage to help finance such a purchase. And as you may already be aware of, a lower rate on your mortgage is ideally what you want . After all, the lower the interest rate, the more affordable the mortgage will be overall.
But there are other terms of the mortgage that should also be compared against other mortgage products. In addition to comparing different mortgage products, its also useful to negotiate with lenders to ensure the mortgage product youre signing for is as suitable as possible to your financial situation.
So, how exactly do you go about negotiating the best mortgage contract for this year? The best way to do that is to understand the terms of your mortgage and understand what you need and want from your mortgage contract.
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The Best Lender Before Wont Be The Best Lender Today
Think about it this way: Your financial goals from when you took on your current mortgage term are likely different from what they are today, right? You could be at a completely different stage in your life now. Well, the same can be said for your lender. Its convenient to stay with your current lender, of course, but convenience comes at a price in the case of mortgage renewals, it may come with a higher interest rate, and terms and conditions that may no longer suit your needs. Consider all of your mortgage needs rate, prepayment options, etc. and go with the lender who can offer everything youre looking for.
Get Help From A Housing Counselor
You can get help with modifying your mortgage for free from a Housing and Urban Development -approved housing counseling agency.
These are experts who have helped out hundreds of homeowners in similar circumstances. They have the expertise and knowledge to give you an honest assessment of your situation, outline your options and help ensure that if you do contact your mortgage servicer to seek a loan modification, your application doesnt get lost, said Sean Coffey, a former housing counselor who is now a media and development manager for California Reinvestment Coalition, a consumer advocacy group. To find a HUD-approved counselor, visit MakingHomeAffordable.gov.
Housing counselors can help you gather the documents and information you need to get a mortgage modification or assistance, Coffey said. They can tell you what your timeline looks like in terms of how quickly you need to act to avoid foreclosure. And they often have built relationships with people at banks or mortgage servicers, so they can advocate on your behalf.
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How To Shop For A Lower Rate
The best thing you can do to get a low mortgage rate is shop around. Youll get a unique rate quote from every lender. Compare the interest rate, closing costs, and points included in these estimates. Youll see which lender actually has the most competitive costs over the life of a 30-year mortgage.
Remember: The company with the lowest upfront mortgage rate might not actually be the cheapest company once points, fees, and closing costs are tallied up.
The company with the lowest upfront mortgage rate might not actually be the cheapest company once points, fees, and closing costs are tallied up.
Lenders do have some flexibility with the rates they offer you. So if you prefer one lender maybe because you know the loan officer personally, or have a branch nearby dont be afraid to bring them a lower estimate and see if they can match it.
In some cases, the company you want to work with will be able to lower your rate to compete with other loan estimates. Other times it wont but it never hurts to ask.
Phase : Define Your Goals
Once youve cracked the information side, it is time to decide what you want to accomplish when negotiating your mortgage. Since you know what the various banks are offering, you can better plan out realistic objectives that would help you in the negotiation process.
Your objectives could vary. You could negotiate a lower interest rate, lower fees, or if you have already contracted the mortgage, a modification of your contract. Your contract may already be in place but if you stumble upon more favorable terms at another bank, you can negotiate to update your contract.
When you plan to sit down on the negotiating table for your contract, you must first settle the following:
- How much financing do you need?
- How long do you want the repayment period to be?
- How much interest are you willing to pay?
- What other associated products do you want to include in the contract?
With these items, you can define your own objectives, and then focus on them when you negotiate. We recommend that you try to keep your monthly installments on your mortgage not to go beyond 35% of your disposable income.
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Ask The Lender If Their Quote Assumes You Pay Discount Points
When you shop lenders, be sure to ask them if their mortgage terms assume that you pay discount points. Some lenders advertise or show a low rate on their web site that includes one or more discount points. You usually only learn this information if you read the fine print for the loan terms, which is not always easy to find.
If you do not know a mortgage quote includes discount points you may think you are getting a low rate but not realize you are paying much higher closing costs. Each discount point equals 1% of your loan amount so if the lenders assumes you pay multiple points, the cost can be significant. It is important to highlight that paying discount points is totally optional and up to you, the borrower. This is why it is a bit sneaky when lenders assume you pay points.
To avoid any unnecessary surprises — and to make sure you have enough funds to close your loan — ask the lender if their terms include points or make sure to read the fine print. If the lenders assumes you pay discount points see if you can find another lender that offers the same low rate without the points. This approach reduces your costs and makes your mortgage more affordable.
Use ourDISCOUNT POINT CALCULATORto compare mortgages with different points, closing costs and rates
Mortgages: How To Negotiate The Best Interest Rate
After several weeks of searching, Ed and Mel have found their dream home. The living room is spacious, the kitchen is kitted out, the master bedroom has an en-suite bathroom, and the garden and terrace offer plenty of privacy. They cant wait to move in! But before they start thinking about decorating and the colour of the curtains, they have to consider financing. And our couple would welcome some advice on how to approach a conversation with their banker.
Ed and Mel have run a few loan simulations and they already know what they can afford. On this basis, they sign an agreement in principle for the house and make an appointment with their bank to negotiate the best loan terms.
Although interest rates on mortgages have been particularly low in recent months , they still have the option to negotiate. They can also compare several banking institutions and pick whichever they like the best. That said, with interest rates so low, the scope for negotiation is fairly limited.
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Easiest Ways To Save On Interest
When youre paid on a weekly or bi-weekly basis, paying your mortgage once a month is costing you money. Accelerating your payments has a huge impact over the long-term.
Assuming your budget can support it, switch to bi-weekly payments and increase the payment amount. The amount you increase will go directly to the principal, so youâll end up paying your mortgage down faster.
If you find the increased payments are too much to handle, some lenders will let you reduce the payments during your mortgage term. If youâre considering this, make sure you discuss that with your lender or broker.
Realizing The System Was Unequal
Loan officers are salespeople and, under the old system of mortgage lending, each had incentive to offer customers the highest mortgage rates possible in order to maximize bank revenues and their own personal commission.
Of course, borrowers were free to check with other lenders to see if they could do better. Just like you can shop for deals when you buy a car.
But a closer analysis of this practice revealed that all customers were not treated equally.
Some customers received very high mortgage rates, and some received very low mortgage rates. Sometimes, loan officers willingly reduced closing costs, and other times they did not. It depended on their individual style of operating.
Mortgage rates sometimes varied by as much as 50 basis points between borrowers of similar traits and characteristics, at the same lender. And it was much easier for discrimination to creep into the process.
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Request A Loan Estimate From Each Lender
When you contact lenders you should request that they provide a Loan Estimate, which is a standard document that outlines the key terms of the mortgage including interest rate and closing costs. Lenders are required by law to provide a Loan Estimate within three business days of a borrower submitting a loan application but most lenders provide one without requiring an application. If a lender refuses to provide a Loan Estimate, this is a red flag and you should contact other lenders.
The Loan Estimate is a standard document that is the same for all lenders which allows you to more easily compare mortgage proposals. When reviewing the document, the key figures to focus on are 1) interest rate 2) Estimated Closing Costs: fees charged by the lender and third parties to process your mortgage and, 3) Annual Percentage Rate : the APR represents what your interest rate would be if it included all up-front lender and closing costs so it is a way to use one figure to compare both the interest rate and closing costs for a mortgage. If the APR is much higher than your interest rate then you know that the closing costs are high and you may want to negotiate lower costs or change lenders
Review How to Use a Loan Estimate
When Should You Negotiate Your Mortgage Rate
After you assess your financial and credit situation and gather a few rate quotes, you can decide if youre in a good position to negotiate for a better rate. This timing holds true whether youre planning to buy a new home or refinance your current mortgage. Borrowers with strong credit who meet all other loan qualifications and who can find competitive rates from other lenders will be best positioned to make their case with their preferred lender.
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A Few Things To Consider When Renewing:
- Are you happy with your current lender?
- Does your lender give you perks, like free banking? Figure out the dollar value to make sure itâs worth staying.
- Do you want to change your payment frequency or amount?
- Do you want the ability to make lump-sum payments directly to the principal?
- Can you handle increasing your payments to pay off your mortgage sooner?
- Would you like to consolidate high interest debt?
- If you sell, would you like to move your mortgage without paying a penalty?
Pull Your Credit Report And See Where You Stand
Websites like FreeCreditReport.com and will let you view your score and complete a three-bureau report for free each year. Knowing where you stand will give you some leverage when talking to banks and lenders. Youâll have a better idea of what you can afford with your credit score by your side, and youâll be able to negotiate with more confidence.
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Know What It Means To Negotiate A Mortgage
If youre applying for a mortgage for the first time or renewing your current one, youll find posted mortgage rates advertised at financial institutions. You may not realize, however, that you can always get a better rate than the one posted, as long as you negotiate.
For example, if the posted five-year fixed rate is 3%, youd be able to negotiate the interest rate down a bit. Besides the interest rate, you can also negotiate some of the contract details, such as prepayment options and cash-back benefits. What youre able to get really comes down to your negotiating skills.