How to save $17K on your mortgage with minimal effort

By following one smart tip, you can save thousands of dollars on your mortgage.

From Yahoo Homes 9/8/14

How to save $17K on your mortgage

Are you thinking of buying a home or refinancing soon? Then keep reading to learn how you can easily save thousands on your mortgage.

Shopping – it’s the American way. And if you’re a savvy shopper, you probably window shop and compare prices on everything from sneakers to washing machines. So why not apply this attitude to looking for a mortgage?

By shopping around for a lender, you could save you a lot of money. How much? Borrowers who sought multiple offers for a 30-year, fixed-rate mortgage experienced an average interest rate difference of .365 percent, according to a May 2014 report by LendingTree, an online source for competitive loan offers.

Doesn’t sound impressive? Then let’s do a little math. According to LendingTree’s data, the average home loan amount for prime borrowers was $223,692. The .365 percent variance in offered rates recorded in May 2014, based on that mortgage amount, would result in a potential savings of $47 a month or $576 per year. Over the life of the mortgage, that adds up to $17,269, according to LendingTree.

Interested now? We thought so, which is why we compiled a few vital tips on how to compare and choose a lender. After all, it could be the most important shopping trip of your life.

How to save $17K on your mortgage with minimal effort

By following one smart tip, you can save thousands of dollars on your mortgage.

Yahoo Homes

How to save $17K on your mortgage
.

View photo

Are you thinking of buying a home or refinancing soon? Then keep reading to learn how you can easily save thousands on your mortgage.

Shopping – it’s the American way. And if you’re a savvy shopper, you probably window shop and compare prices on everything from sneakers to washing machines. So why not apply this attitude to looking for a mortgage?

By shopping around for a lender, you could save you a lot of money. How much? Borrowers who sought multiple offers for a 30-year, fixed-rate mortgage experienced an average interest rate difference of .365 percent, according to a May 2014 report by LendingTree, an online source for competitive loan offers.

Doesn’t sound impressive? Then let’s do a little math. According to LendingTree’s data, the average home loan amount for prime borrowers was $223,692. The .365 percent variance in offered rates recorded in May 2014, based on that mortgage amount, would result in a potential savings of $47 a month or $576 per year. Over the life of the mortgage, that adds up to $17,269, according to LendingTree.

Interested now? We thought so, which is why we compiled a few vital tips on how to compare and choose a lender. After all, it could be the most important shopping trip of your life.

What Type of Lender is Right for You?

Finding the right lender is an important first step in your mortgage hunt or refinance. And as with any shopping expedition, you have a lot of choices.

Basically, there are three types of lenders, says Jim Duffy, a senior loan officer with Primary Residential Mortgage, Inc.

The first type is a direct lender, such as Freddie Mac, Fannie Mae, Wells Fargo, Quicken Loans, and other big banks that own and service the mortgages they grant, says Duffy. These lenders offer competitive rates because there is no middleman involved. However, they may not have the local knowledge or personal service you need, says Duffy.

The second type of lender is the mortgage broker, who acts as an intermediary between you and various direct lenders. This mortgage professional will take your application and try to find a lender and loan that best fits your needs, says Duffy. He or she acts as your representative and takes care of a lot of the headaches that arise in the mortgage process. For that, however, they get a nominal fee built into the price of the mortgage, he explains.

Lastly, there is the correspondent lender. An example of this is a credit union or an online lender, which may or may not have their own underwriting authority – that is, final say on whether you qualify for a loan. Instead, correspondent lenders are governed by the guidelines of the lenders who will own or buy the mortgage after they sell it, Duffy says.For any one of these, the most important factor is trusting the representative with whom you will have direct contact, whether it’s the broker, the loan officer, or direct lender, says Duffy.

“They really have to take over and ask some probing questions about what the short-term and long-term goals of the clients are. How is this going to factor into being able to save money for other purposes such as retirement or kids’ education or whatever? Make sure they have your best interests at heart,” says Duffy.

Another issue may be your location or whether you’re buying a home or refinancing, Duffy says. If the home you’re purchasing has unique or complicated issues, such as odd zoning or defects, a very personal touch may be needed.

On the other hand, if you’re doing a straightforward refinance with minimum paperwork or complications, online lenders are often great for that, Duffy explains. So no one type is bad or good – it really comes down to your specific situation and preference.

[Ready to refinance or shop for a mortgage? Click to find the right lender for you.]

How to Compare Lenders

Once you decide the type of lender you want, you’ll be ready to go shopping. But what should you be comparing exactly?

One of the most important factors to consider is the annual percentage rate (APR) that a lender is offering, says Doug Lebda, LendingTree’s founder and CEO. It’s important to note that the APR differs from the advertised interest rate in that the APR includes the effective interest you’ll pay after things such as fees and points are included, says Lebda.

That means the “real” interest rate (the APR) is higher than that advertised rate you thought you were getting and will help you figure out which loan is a better deal.

Another tip in comparing rates and lenders is to call various lenders at the same time so you get an apples-to-apples comparison of their rates and products, says Timothy Manni, managing editor of HSH.com, the nation’s largest publisher of mortgage and consumer loan information.

For example, Manni suggests calling them all before noon on the same day. Believe it or not, rates can change within hours, so this will at least give you a feeling for who is offering the most competitive rates.

Beyond the cold, hard numbers, you should also check out each lender’s reviews to see how they stack up from a human perspective. If you’d like to utilize this tool in your search, a good place would be Zillow.com, which has an online database of thousands of lender reviews.

The reviews are based on four categories – responsiveness, knowledge, helpfulness, and follow-through. According to Zillow, the reviews are written by past and current clients of the lender, and all of them are moderated by a trained team of moderators who evaluate the reviews before publication.

If you’d like to do things the old-fashioned way, you could also seek out word-of-mouth recommendations from your friends, colleagues, and family. Either way, the experiences that other homebuyers had with a lender are good indicators of how your own experience may go with the same lender.

What to Watch Out For

Sure, you want to find a low mortgage interest rate. After all, over the life of a 30-year mortgage the interest you pay can add up to more than the original principal you borrowed. But the interest rate is only one of the factors you’ll want to consider, and there are a few financial land mines you need to watch out for, according to Manni.

For instance, many of those super-low interest rates lenders advertise are for mortgage products in which you pay higher fees or points, which can really add up, says Manni.

Points are paid out-of-pocket by the borrower to lower the interest rate. One point equals one percent of the mortgage amount, so on a $300,000 mortgage, two points equals $6,000. That kind of kills the warm and fuzzy feeling a low interest rate might give you.

Another consideration, says Manni, is the term of the mortgage. For example, you can get a very low interest rate on a five-year adjustable rate mortgage (ARM), he says. “But that rate will adjust in five years, and then again every year, so if you plan on being in your home longer than that, it could be a very bad loan for you,” he says.

This is because most analysts see mortgage interest rates doing nothing but going up in the future. So an ARM, which adjusts annually after the initial five-year period, could end up costing you much more in interest than a 30-year, fixed-rate mortgage with a higher initial interest rate, says Manni.

So the lesson is that the interest rate is important, but not the only thing.

Exceptions to the Rule

As Manni said, the interest rate is only one factor in your search for a lender, albeit the most important one. But there are certain times that accepting a higher interest rate on the same mortgage may make sense.

For instance, if you can’t put down 20 percent on your home purchase, you could use a slightly higher interest rate to pay for private mortgage insurance (PMI), says Duffy. In order to protect themselves against default, lenders often require borrowers who don’t have 20 percent down to pay for PMI, which can add hundreds of dollars to your monthly payment.

“People don’t like to pay PMI and they think they have to put 20 percent down to avoid the monthly [insurance] bill, but they should at least explore if it makes sense to put say 10 percent down and do what’s called lender-paid mortgage insurance. That way you buy out the mortgage policy up front so you don’t have a monthly bill,” says Duffy.

He says there are a few ways of doing that. “You can either pay an up-front fee or buy it out, or increase the interest rate slightly – an eighth to a quarter percent usually – so the lender has enough yield to buy it out,” he says.

What does this have to do with shopping for a lender? “If you are in a situation where you need PMI, your representative should at least be bringing options like this up to you,” he says. After all, he says, shopping for the right mortgage, with the right mix of features for your life and finances, is all about seeing the full range of choices.

Remember, this is a shopping trip for something you may be paying off for the next 30 years. So take your time and do it right.

Finding the right lender is an important first step in your mortgage hunt or refinance. And as with any shopping expedition, you have a lot of choices.

Basically, there are three types of lenders, says Jim Duffy, a senior loan officer with Primary Residential Mortgage, Inc.

The first type is a direct lender, such as Freddie Mac, Fannie Mae, Wells Fargo, Quicken Loans, and other big banks that own and service the mortgages they grant, says Duffy. These lenders offer competitive rates because there is no middleman involved. However, they may not have the local knowledge or personal service you need, says Duffy.

The second type of lender is the mortgage broker, who acts as an intermediary between you and various direct lenders. This mortgage professional will take your application and try to find a lender and loan that best fits your needs, says Duffy. He or she acts as your representative and takes care of a lot of the headaches that arise in the mortgage process. For that, however, they get a nominal fee built into the price of the mortgage, he explains.

Lastly, there is the correspondent lender. An example of this is a credit union or an online lender, which may or may not have their own underwriting authority – that is, final say on whether you qualify for a loan. Instead, correspondent lenders are governed by the guidelines of the lenders who will own or buy the mortgage after they sell it, Duffy says.For any one of these, the most important factor is trusting the representative with whom you will have direct contact, whether it’s the broker, the loan officer, or direct lender, says Duffy.

“They really have to take over and ask some probing questions about what the short-term and long-term goals of the clients are. How is this going to factor into being able to save money for other purposes such as retirement or kids’ education or whatever? Make sure they have your best interests at heart,” says Duffy.

Another issue may be your location or whether you’re buying a home or refinancing, Duffy says. If the home you’re purchasing has unique or complicated issues, such as odd zoning or defects, a very personal touch may be needed.

On the other hand, if you’re doing a straightforward refinance with minimum paperwork or complications, online lenders are often great for that, Duffy explains. So no one type is bad or good – it really comes down to your specific situation and preference.

How to Compare Lenders

Once you decide the type of lender you want, you’ll be ready to go shopping. But what should you be comparing exactly?

One of the most important factors to consider is the annual percentage rate (APR) that a lender is offering, says Doug Lebda, LendingTree’s founder and CEO. It’s important to note that the APR differs from the advertised interest rate in that the APR includes the effective interest you’ll pay after things such as fees and points are included, says Lebda.

That means the “real” interest rate (the APR) is higher than that advertised rate you thought you were getting and will help you figure out which loan is a better deal.

Another tip in comparing rates and lenders is to call various lenders at the same time so you get an apples-to-apples comparison of their rates and products, says Timothy Manni, managing editor of HSH.com, the nation’s largest publisher of mortgage and consumer loan information.

For example, Manni suggests calling them all before noon on the same day. Believe it or not, rates can change within hours, so this will at least give you a feeling for who is offering the most competitive rates.

Beyond the cold, hard numbers, you should also check out each lender’s reviews to see how they stack up from a human perspective. If you’d like to utilize this tool in your search, a good place would be Zillow.com, which has an online database of thousands of lender reviews.

The reviews are based on four categories – responsiveness, knowledge, helpfulness, and follow-through. According to Zillow, the reviews are written by past and current clients of the lender, and all of them are moderated by a trained team of moderators who evaluate the reviews before publication.

If you’d like to do things the old-fashioned way, you could also seek out word-of-mouth recommendations from your friends, colleagues, and family. Either way, the experiences that other homebuyers had with a lender are good indicators of how your own experience may go with the same lender.

What to Watch Out For

Sure, you want to find a low mortgage interest rate. After all, over the life of a 30-year mortgage the interest you pay can add up to more than the original principal you borrowed. But the interest rate is only one of the factors you’ll want to consider, and there are a few financial land mines you need to watch out for, according to Manni.

For instance, many of those super-low interest rates lenders advertise are for mortgage products in which you pay higher fees or points, which can really add up, says Manni.

Points are paid out-of-pocket by the borrower to lower the interest rate. One point equals one percent of the mortgage amount, so on a $300,000 mortgage, two points equals $6,000. That kind of kills the warm and fuzzy feeling a low interest rate might give you.

Another consideration, says Manni, is the term of the mortgage. For example, you can get a very low interest rate on a five-year adjustable rate mortgage (ARM), he says. “But that rate will adjust in five years, and then again every year, so if you plan on being in your home longer than that, it could be a very bad loan for you,” he says.

This is because most analysts see mortgage interest rates doing nothing but going up in the future. So an ARM, which adjusts annually after the initial five-year period, could end up costing you much more in interest than a 30-year, fixed-rate mortgage with a higher initial interest rate, says Manni.

So the lesson is that the interest rate is important, but not the only thing.

Exceptions to the Rule

As Manni said, the interest rate is only one factor in your search for a lender, albeit the most important one. But there are certain times that accepting a higher interest rate on the same mortgage may make sense.

For instance, if you can’t put down 20 percent on your home purchase, you could use a slightly higher interest rate to pay for private mortgage insurance (PMI), says Duffy. In order to protect themselves against default, lenders often require borrowers who don’t have 20 percent down to pay for PMI, which can add hundreds of dollars to your monthly payment.

“People don’t like to pay PMI and they think they have to put 20 percent down to avoid the monthly [insurance] bill, but they should at least explore if it makes sense to put say 10 percent down and do what’s called lender-paid mortgage insurance. That way you buy out the mortgage policy up front so you don’t have a monthly bill,” says Duffy.

He says there are a few ways of doing that. “You can either pay an up-front fee or buy it out, or increase the interest rate slightly – an eighth to a quarter percent usually – so the lender has enough yield to buy it out,” he says.

What does this have to do with shopping for a lender? “If you are in a situation where you need PMI, your representative should at least be bringing options like this up to you,” he says. After all, he says, shopping for the right mortgage, with the right mix of features for your life and finances, is all about seeing the full range of choices.

Remember, this is a shopping trip for something you may be paying off for the next 30 years. So take your time and do it right.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s