In the age of the internet and quick, expansive searching, comparison shopping is commonplace. It’s easy to read through reviews, scout out the price at a few different retailers, and then make the purchase feeling as if you did your due diligence.
Shopping for a mortgage isn’t quite so simple. There are a variety of factors to consider, a million loan products to sort through, and a long list of terms that sound foreign to a large portion of the population. But don’t let that deter you from comparison shopping — after all, this is probably the biggest purchase you will make in your life.
Instead, follow these guidelines to find the best mortgage for your needs.
Know what you’re looking at
In an attempt to encourage mortgage comparison shopping and improve consumer education, last year the Consumer Financial Protection Bureau (CFPB) launched the Know Before You Owe mortgage initiative.
One of the biggest changes made through this program was to streamline paperwork and make loan estimates easier to understand. (Take a look at what the new Loan Estimate looks like here.) Now you will be able to pinpoint the terms that will have the biggest impact on your financial situation and ensure you’re getting exactly what you expected.
With that in mind, let’s take a deeper look into what you should be considering as you begin to compare mortgage loan products.
Know what type of loan you’re looking for
In addition a wide range of lenders and terms, mortgages are also divided into several different types.
Fixed rate mortgages will keep your interest rate locked for the life of your loan and usually come with either 15 or 30 year terms. If you plan on staying in your home for more than a few years, this will likely be your best bet.
If, on the other hand, you plan on only staying in your home for a few years or you don’t mind taking a gamble, you could consider an adjustable rate mortgage with an interest rate that can fluctuate after a designated period of time (three or five years, for instance). While these types of mortgages usually have the lowest rates, the rates can skyrocket at the end of that period, leaving you with a much higher mortgage payment should you decide to stay.
Know the terms each lender is offering
Mortgage rates and terms can vary wildly from lender to lender. Make sure you gather at least three different estimates and pay careful attention to these four areas.
Interest Rate
A study by the CFPB found interest rates can vary by more than .5% from lender to lender — a huge difference when you consider the cost and length of a mortgage loan. Also, some lenders will factor mortgage points into the interest rate you see, which requires you to pay 1% of the loan amount per point upfront in order to land that rate.
Required Down Payment
Not every loan has the same requirement when it comes to the size of the down payment. The amount you bring to the table could depend on a variety of factors, but it’s important to know what’s expected and, if it’s below 20%, whether Private Mortgage Insurance (PMI) will be an additional expense.
Closing Costs
Closing costs usually fall between two and five percent of the total loan amount. Make sure you know what you will be charged and what it includes.
Prepayment Penalties
In exchange for a lower rate, some lenders will charge a prepayment penalty — an amount that must be paid if you refinance or sell the home before a designated period of time. While you might think this won’t affect you, certainly take it into consideration when making your decision.
Shopping for a mortgage might seem intimidating, but the payoff is huge. By taking the time to do your research and compare terms, you can save thousands over the life of your loan and keep your hard-earned cash in your wallet. Now what’s better than that?