As a followup to last week’s article on whether or not you should pay off your mortgage early, I thought I’d talk a bit about how to find the best mortgage rates. To date, we’ve bought two houses, sold one, and refinanced three times. Thus, we have a good bit of personal experience when it comes to finding a mortgage. What follows are some tips that we’ve picked up along the way.
Check your credit
Given all that’s transpired over the past year or so, it should come as no surprise that your credit score is more important than ever when it comes to getting a great deal on a mortgage. As such, your first step should be to check your credit report and fix any errors that you find. Just be sure to give yourself enough lead time to get things sorted out. Here’s why…
I recently ran across a panicked letter that I faxed to Chase back in 2001. As it turns out, I checked our credit report before applying for our first mortgage and discovered a delinquency that had never happened. When I contested this with the credit bureau, Chase came back claiming that the information was accurate. Thus, the black mark stayed on our record.
Because I didn’t discover this problem until the last minute, time was running short, and I had to quickly resolve the problem directly with Chase. I ended up faxing them a letter the day before we applied for our mortgage explaining the situation and essentially begging them to help us out. In the end, we got the problem taken care of, but we could’ve avoided a lot of stress by simply starting sooner.
Beyond making sure your credit report is accurate, you might also want to check out your credit score itself. Unfortunately, while you’re legally entitled to free access to your credit report, the same is not true of your credit score. The good news is that you can get a free peek at your credit score if you’re willing to jump through some hoops… Simply sign up for a free trial at FreeCreditReport.com or MyFICO. Just be sure to cancel before you get charged.
Get the lay of the land
If you haven’t already decided what sort of mortgage you’re looking for, online mortgage marketplaces are a great way to get a feel for the prevailing rates on different types of mortgage – you can quickly compare rates on fixed vs. adjustable rate mortgages, 15 vs. 30 year terms, etc. With that info in hand, it’s much easier to identify the best option for your situation.
Find the best mortgage rate
Once you know what you’re looking for, check the mortgage rates offered by your local bank or credit union. Their rates may or may not be competitive, but you’ll never know if you don’t ask. Beyond that, you should consider asking friends or family if they can recommend a reputable mortgage broker.
While a mortgage broker isn’t absolutely necessary, working with one can make finding the best mortgage deal much easier. Ideally, you should contact more than one broker and see what they can offer you. Just be sure to ask for a “good-faith estimate” from each so you can make an informed comparison based on the full rundown of rates, fees, etc.
Once you’ve found what appears to be the best deal, start shopping it around. Go back to your bank, any other brokers that you’ve had contact with, etc. and see if they can beat it. Even if they can’t beat the rate, they might be able to sweeten the deal by knocking some money off your closing costs, etc. Remember, you’re looking for the best overall deal, not just the lowest rate. A bit of extra work here can pay huge dividends.
Of course, you should also be comparing these offers back to the rates that you found online. Just be careful… I’ve found that some lenders are less than honorable when it comes to making good on the rock bottom rates that they advertise online.
Some words of warning
If you’re buying new construction, you might feel some pressure to use the builder’s “preferred” lender. While they’ll likely offer to throw in some freebies if you use their guy, you probably won’t get the best overall deal if you simply say “yes.” Instead, negotiate with them on this point.
When we bought our first house, we agreed to use the builder’s lender, but only if they matched the best deal we could find. We also negotiated to get the freebies even if their mortgage guy couldn’t match our best deal. This put a lot of pressure on them to deliver, and they ultimately came through.
Finally, when it comes time to close, be sure to read everything they put in front of you. You might feel like uncomfortable making the closing attorney sit there while you read through all the paperwork, but that’s their job. If you simply can’t stomach doing this, you at least need to go over your HUD-1 settlement statement (which lists all the details of your deal) with a fine-toothed comb.
When we bought our first house, we had an 80/10/10 “piggyback” mortgage. While everything was fine with our first mortgage, the settlement statement listed the wrong (higher) rate for our second mortgage. Obviously, this could’ve caused a lot of trouble if we hadn’t been paying attention.
I have been in the Mortgage Industry for 10+ years . This industry can be confusing and stressful for borrowers so I try to make it as simple as possible. I specialize in FHA loans (rehab, refinance & purchase) VA Loans and USDA 100% Loans. I have helped many customers achieve their loan and credit goals.
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I think another important point here is to ensure that the plan of the building is approved by the relevant authorities, the builder is a reputed one,. the society is formed , the title of the property is clear etc. It will ensure that there are no surprises later on.
Yeah, rolling it in is my theory. He swears up and down that’s not it, it really only cost $300, but like I said I don’t think this guy is as smart as he thinks he is. Thanks for thinking about it, Nickel. I just wanted the reassurance before I spent another afternoon searching for this mythical super-cheap mortgage broker.
Darwin’s Finance, that’s exactly what we did – a NPV of what’s left of our current mortgage if we made an extra payment equal to the good faith estimate of refinance costs, vs. the lifetime cost of the new mortgage as presented, vs. the lifetime cost of the new mortgage if we make the payment we’re making now.
If we make the required payment on the new mortgage, it will be slightly cheaper than if we threw the extra money at our current mortgage, and take 15 years to pay off. If we make our current payment on the new mortgage it will save us a *lot* of money, and be done in 8 years.
My partner’s only 30 so we’ll be completely out of debt before he’s 40 and before our child starts high school. That’s kind of stunning, actually. We’re frugal just because we are, pretty much – we never really looked at the effect on the future until we did all these refi calculations.
I just closed a deal with a mortgage broker I can endorse. Didn’t know him previously, he was a referral from a friend. But, I got the following deal in April:
30 yr conventional
4.625%
no points
closing fees <3K
Nothing else, no hidden fees. At closing, the GFE was right on.
In addition to the great tips here, I also built a net present value model to compare various options (i.e. might have one option with a higher % rate, but lower fees or option 2 you may be able to pay a point to get .5% lower – how do you assess the best deal without comparing NPV??).
So, not to be a gratuitous “link-dropper”, but for anyone that wants the model I built in excel or the contact on the mortgage broker I used (which by the way, beat the pants off all the banks and mortgage outfits I contacted myself, including existing lender), it’s all in my Mortgage NPV post here:
Hope it works out; hate to see people getting ripped by the fly-by-night outfits or even the big banks, that in spite of taking billions in bailout funds, have shown no propensity for wanting to lend at competitive rates to creditworthy borrowers.
http://www.darwinsfinance.com/net-present-value-why-you-should-use-it-in-everyday-life/
Rosa: They may be covering some of the fees themselves to drum up business, but it’s also possible that they’re rolling those costs into the mortgage. For example, if you currently owe (say) $100k on your mortgage, your new mortgage might end up being $103K, with that extra $3k being used to cover some or all of the closing costs. Does that make sense?
I have a question:
we have a relative who works at a mortgage company and has an MBA, so he’s always trying to give us financial advice, but I’ve watched him make some bad decisions that undermine his supposed expertise (very high fee mutual funds, misunderstanding the tax implications of some bonds, stuff like that).
He pushed us and pushed us to refi, and we’re doing it now because it’s going to save us a ton of money and speed up our mortgage payoff by about 5 years – not only are rates lower than when we got our mortage, our credit ratings are higher and we’re switching to a 15 year loan.
We contacted 3 banks that had low rates on bankrate.com, and also our credit union. They all came in at about $3000 on the good faith estimate, and most of it looks non-negotiable – title fee (if we switch banks; if we stick with the bank that holds our mortgage they’ll waive it) taxes, etc – the actual refinance fee is actually a small part of the overall good faith estimate.
This relative claims he found a mortgage broker who got him a refi for $300, and I don’t see how that’s even possible unless the broker ate some of the taxes and other fees, which it seems like they don’t have a motivation to do – I suspect this relative just wasn’t paying attention and rolled most of the costs into his mortgage.
Do you think it’s possible there are mortgage brokers out there eating taxes & title fees to drum up business, and I should had looked harder, instead of dealing directly with the banks?