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What to look for when you're loan shopping

Posted on September 16 By Peter Andrew

When Fannie Mae published its National Housing Survey Topic Analysis Report in November 2012, the document made sad reading. Its major findings can be summed up in a single sentence from the organization's chief economist Doug Duncan: "Homeowners who don't obtain multiple mortgage offers or carefully compare rates are essentially leaving money on the table."

Mortgage brokers aren't always a good choice

The survey found that the very people who most need the best deals -- those in lower income brackets -- are the least likely to get them. Nearly half of those on lower incomes got just one mortgage offer from a single lender, putting them at a real disadvantage. Almost two-thirds of better-off borrowers shopped around.

That may be partly due to those on higher incomes being less willing to rely solely on one professional to source their home loans. Only 14 percent of them took their real estate agent's home loan referral, and 17 percent took a mortgage broker's. The same figures for those on $50,000 a year or less were 29 percent and 30 percent respectively.

Mortgage brokers, can, of course, be very helpful, and many are scrupulously honest. But failing to shop around for home loans means borrowers are unable to be sure they're getting the best deal. And that can be expensive: Research commissioned by the U.S. Department of Housing and Urban Development (HUD) last year found that those getting multiple quotes commonly saved $1,000 or more in closing costs compared to those with just one. As Steve Deggendorf, another Fannie Mae economist, highlights: "Consumers who undertake the mortgage shopping process without a thorough evaluation of their options may risk selecting a more costly mortgage, or worse, a financially unsustainable one."

Finding the best mortgage loan

Fannie Mae and HUD's findings merely confirm what's been known for some time. The HUD website has a PDF consumer guide, Looking for the Best Mortgage, that has, besides its title, just three words on its front cover: Shop, Compare, Negotiate. Inside it points to the Internet as a good place to start shopping for a home loan.

It is worth downloading that PDF, not only because it contains sound advice and a helpful glossary, but also because it provides a worksheet into which you can enter details of different mortgage quotes in a way that could help you compare them more effectively.

Comparing mortgage quotes

Comparing mortgage quotes isn't hard, but first you need to know what to look out for. For most, the two key factors are:

  1. The ongoing mortgage rate, which should normally determine your monthly payments.
  2. The closing costs (points, fees and so on) you're going to have to pay to finalize your purchase.

Focus on the deal

The importance you place on each of these should usually be determined by your personal financial situation: If you're short of ready cash but are keen to buy a home, you may be prepared to pay a bit more each month to avoid the high initial costs that stand between you and what you want. Conversely, if you're cash-rich but income-poor, then you're more likely to pick a loan with smaller monthly payments. You may even be willing on closing to pay extra for points that buy you a lower rate. Compare quotes to find the one that suits your needs best.

Whatever your situation, don't regard mortgage offers as set in stone. Use your comparison worksheet to implement the third of HUD's suggested tactics: Negotiate. Play one lender off against another until you have an overall deal that you believe can't be bettered. After all, this may be one of the biggest financial transactions of your life; it's worth investing a bit of time to get it right.

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