Ask Our Broker With Peter G. Miller
By Peter G. Miller
CTW Features
Question: I always see that mortgage borrowers are advised to “shop around.” I have now spoken with a number of lenders and their offers are pretty much identical. With the internet grinding down mortgage rates, is extensive shopping still important?
Answer: Offers that are “pretty much identical” are not identical. Small difference in rates and terms can mean much bigger expenses for borrowers.
In August, the National Association of Realtors reported that the typical existing home sold for $253,500. Let’s say we buy such a property with 5 percent down ($12,675). The mortgage will be for $240,825.
Let’s consider mortgage offers from two lenders. One is at 4 percent and another is at 4.25 percent. Doesn’t seem like a lot but after five years, the 4 percent loan will have an interest cost of $45,979 while the financing at 4.25 percent will have a cost of $48,945.
Same mortgage amount but a difference of $2,966 in interest costs in the first five years.
Think about it this way: How many hours would you have to work in order to earn almost $3,000? A few extra hours spent mortgage shopping could be very profitable.
You can compare mortgages with different rates by going to the page put up by the Consumer Financial Protection Bureau at: https://www.consumerfinance.gov/owning-a-home/explore-rates/.
If rates were the only difference between lenders then things would be fairly simple but that’s not the case.
For instance, not all lenders offer the same mortgage programs. If you want to buy a home, fix it up and not get two mortgages, then you may want to look at the FHA 203K program or Fannie Mae’s HomeStyle Renovation loans. Both loans only require one closing to buy and fix-up a property, something that can save thousands of dollars in closing costs when compared with one mortgage to buy the property and a second for repairs.
Also, it turns out that not all lenders have the same underwriting criteria. It may be that a loan program allows borrowers to use as much as 43 percent of their monthly income for debts. Some may be more conservative and only allow as much as 42 percent for the debt-to-income (DTI) ratio, a process called “buffering” or “layering.”
The idea of speaking with several lenders is not meant to cause misery, instead it’s intended to help borrowers ask questions, poke around, and get better mortgages. If you won’t shop around then the lender will have every advantage, and that could be very costly.
© CTW Features
Peter G. Miller is author of “The Common-Sense Mortgage,” (Kindle 2016). Have a question? Please write to [email protected].