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How to Compare Mortgage Loans and Lenders

If you’re preparing to buy a home, you might be confused about the different financing options available to you. Luckily, we’ve put together this quick guide to help you understand mortgage loans so that you can choose the best lender for you and your family. 

Read on for tips and tricks about how to compare mortgages so that you can move through the next steps in your home buying journey with confidence! 

How to Compare Mortgage Loans

Just like houses, mortgages come in many different shapes and sizes. So you will want to get familiar with the following terms and phrases before you hit the apply button.

Interest Rate vs. APR

You should always compare the annual percentage rate (APR) on offer and not just interest rates. Here’s why: 

  • The interest rate is how much you pay your lender to borrow the money. 
  • The annual percentage rate (APR) includes certain fees and reflects the true cost of borrowing. 

Note: your APR will be based on your credit score, debt-to-income (DTI) ratio, down payment, and the type of mortgage and term you choose. 

Short vs. Long Terms 

When comparing mortgages, be sure the lender offers you a term that has a monthly payment you can afford, as well as suits your long-term financial goals.

  • Shorter terms get lower rates so you pay less total interest, but your monthly payment will be higher.
  • Longer terms get higher rates so you pay more total interest, but your monthly payment will be more affordable.

Fixed-Rate vs. Adjustable-Rate Mortgages (ARM) 

You may have seen the term ARM on a rates table, but maybe you’re not sure what it means. Here’s a quick rundown so you can compare these common mortgage types.

Fixed-rate: 

  • Your interest rate and monthly payment stay the same throughout the life of your loan.
  • Budgeting is easier, so you have peace of mind. 
  • If market rates drop after you get your loan, you can refinance your home loan to get a lower rate or change your term and payment.

ARM: 

  • Your interest rate is fixed for an initial period and in that time, the rate you get is often lower than you would for a fixed-rate mortgage. 
  • After the initial period, your rate will adjust with the markets so it may be higher or lower than a fixed-rate mortgage.
  • You get a lower payment at the start of your loan term so you have time to boost your income or save funds for when your rate adjusts. It’s also a popular option if you plan to sell or refinance in the short term before your rate adjusts.
  • There are many types of ARMs. For example, a 7/1 ARM means you get a fixed rate for seven years then your rate will adjust each year. There are caps on how much your rate can go up each time it adjusts and in total over the life of your loan. 

Fees and Closing Costs

When comparing mortgages, you need to take note of the fees and charges for different types of mortgages and from the different lenders. Here are a few fees you might see:

  • Application fee or loan origination fee
  • Underwriting fee to review and process your loan documents
  • Appraisal fee
  • Property taxes and other government fees
  • Insurance
  • Mortgage points
  • Prepayment penalty 

Loan Points vs. Credits

Some lenders offer loan points or credits so you can negotiate your interest rate. Be sure you read the fine print and understand the long-term effects on your loan cost.

  • Mortgage points or discount points: These let you “buy down” your interest rate. So you pay your lender an upfront fee in exchange for a lower rate.
  • Credits: You agree to a higher interest rate and in return, your lender pays some or all of your closing costs so that you save on upfront expenses.

Insurance

Mortgage insurance protects your lender in case you default on your loan. Be sure to weigh in the annual or upfront fees required by different home loans. 

  • A conventional loan may need private mortgage insurance (PMI) if your down payment is under 20%.
  • FHA loans often need upfront mortgage insurance (UFMI).

How to Compare Mortgage Lenders

Now that you have plenty of information about mortgages under your belt, you can start to think about which lender will provide you with the best service, advice, and rates. 

Local Service vs. Nationwide

When you get your mortgage from a local lender, you’ll get friendly service from a team that truly understands your town and the properties for sale. Your loan can be serviced locally, too.

If you choose a major financial institution, there’s a risk you might just be a number on the balance sheet and therefore not get the time and attention you deserve.

Education Resources

Don’t forget to compare the tools on offer to help get your finances in order so that you can qualify for a great rate and navigate the home buying journey with ease. Local lenders may be more likely to go the extra mile to make sure you have a stress-free experience.

Not-For-Profit vs. For-Profit

Many financial institutions are for-profit public companies so they’re motivated by earning more money to give back to shareholders and reward executives. On the other hand, credit unions can pass revenue back to members in the form of lower rates on loans and higher dividend rates on savings accounts.

Community Partner

You’ll get more than just an affordable mortgage if you choose a friendly, local lender. You’ll become a member of a community with like-minded people. You can even attend events hosted by the lender or help give back to a great cause with fellow members by your side. 

Transparency

You want your lender to be honest and trustworthy. For example, make sure you get a comprehensive list of all possible fees and be conscious of whether or not the loan officers are willing to answer all your questions, great or small.

Shop Around Within 45 Days

Each potential lender will check your credit report when you apply to get pre-qualified for your home loan. These soft inquiries lead to a small, temporary dent in your credit score. 

But if all these credit checks take place in a small window of time, it counts as just one hard inquiry on your credit report, which is better for you in the long run.

Next Steps: Choosing the Right Loan and Lender

By now, we hope you’re feeling fully informed about how to compare mortgages. The good news is that you don’t have to go through the loan process alone. 

NextMark Credit Union is here to offer you guidance and great rates so you can turn the door key on your new home sooner. Click below to find out more about our mortgage loans!

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