Comparing Lenders part 2: Finding the best deal

How do you find the best mortgage deal?  You notice I didn't ask "How do you find the best interest rate?"  This is because in my post on July 24 titled "What is the best interest rate", I talked about the reason that the lowest interest rate is NOT always the best deal for YOU!

In order to be able to compare two or more lenders to determine which lender is offering the best deal, you have to look at the fees that each lender is charging you in addition to the interest rate that they are offering.  Refer to the previous post, "Comparing Lenders: Lender Fees vs. Closing Costs" for more detail on this topic.

This seems pretty simple, but it's not always as cut and dry as you would think.  Let's look at an easy comparison first, then we'll look at a scenario that is more realistic.  Keep in mind that you should also consider other factors when choosing a lender, but this post is focusing only on getting the best financial deal.

Comparison 1

Lender A is offering a 4.5% interest rate.  They are charging an Origination fee of $500.

Lender B is offering a 4.5% interest rate.  They are charging an Origination fee of $750.

It doesn't take a rocket scientist to determine that Lender A's option is a better deal than Lender B's.  Both lenders have the exact same interest rate and they call their fee by the same name.  So obviously you would want to pay the least amount for a particular rate.  But that's not usually how it happens in the real world.  Let's look at a more realistic scenario.

Comparison 2

Lender A is offering a 4.25% interest rate.  They are charging an Origination fee of $2000, Discount points of $1000, an Underwriting fee of $600, and a Processing fee of $400.

Lender B is offering a 4.5% interest rate.  They are charging an Underwriting fee of $500 and no other fees.

Lender A is offering a lower interest rate but you have to pay $3500 more to get that interest rate.  How do you determine which option is better for you?  It depends on your goals and your particular situation.


The first question to ask yourself is Do you have and want to spend the extra $3500 at closing?  Many buyers feel that it is more important to close on their home with as little out-of-pocket expense as possible.  The second question is How much money will I be saving with the lower interest rate? 

Let's say for example that the lower interest rate option saves you $30 per month on your monthly payment, but costs you $3500 extra up front.  This means that it will take you 116.67 months, or 9.7 years to recover the cost that you paid up front. 

Will you be retiring in this home?  If so, the lower interest rate/higher cost option may be best for you.  If you are like most people, you will likely only own the home for 5-7 years.  If this is the case, then you would benefit by taking the higher interest rate and saving the up front cost.  Be sure to consult with a professional Mortgage Loan Officer that will help you determine the best option for you.

Side note:  In a previous post I mentioned that the VA will not allow a buyer to pay certain costs.  Read my previous post to learn about how a loan structured with high lender fees can be a detriment to the veteran home buyer.  I will write more later about the costs a VA home buyer can and cannot pay when using a VA Home Loan.

Comparing Lenders: Lender Fees vs. Closing Costs

In my last post I discussed the relationship between interest rates and lender fees.  The biggest mistake a lot of home buyers make when comparing lenders, is to be confused by the difference between lender fees and "closing costs".

Many people will ask a lender to give them an estimate of "closing costs" as a way to compare lenders. This is not a good way to compare lenders because while "closing costs" do include lender fees, it also includes a lot of costs that have nothing to with the lender that you choose.

Many closing costs are charged by third parties that are unrelated to the lender, and these third party fees will be the same no matter which lender you choose.  Examples of some of these costs are title insurance and closing/escrow fees, taxes and recording fees charged by the state or county, property survey fee, etc.  Lenders will estimate these third party costs differently so comparing the total closing costs estimates received from lenders will give a home buyer a false comparison.  

The best way to compare the difference in cost between lenders is to isolate the true "lender fees" from the third party closing costs.  Lender fees can go by many names such as Origination Fee, Underwriting fee, Administration fee, Processing fee, Document Preparation fee, etc.  Lenders may also charge Discount points, which will also have to be considered when determining the overall cost (Discount points will be discussed in more detail in a later post).  

In summary, when comparing lenders you want to ask them for an itemization of their fees. This will give you the basic foundation for comparison.  Once you know all of the costs associated with doing business with your prospective lenders, along with the interest rates that those lenders are offering, you will ALMOST be ready to pick the best offer.  I say almost because it's usually not as cut and dry as you would think.  In the next post, I will discuss putting all of the facts together so you can determine your best offer.

What is the best interest rate?

This is the first question that most people would ask, right?  After all, the interest rate can make the difference of thousands of dollars over the life of the loan.  Besides that, every advertisement that we see and hear is touting that their company has lower interest rates than every other lender.  But is the lowest interest rate always the BEST DEAL? The answer is absolutely NOT!

Surprised?  I'll explain.  Lenders make money two ways:  They make money with the interest rate that they charge AND they also make money by charging fees.  A lender with higher fees can give a lower interest rate because you are paying more up front.  A lender with lower fees will likely charge a higher interest rate.  In other words the relation between rate and fees works like a see-saw...when one goes up, the other goes down.  

The more money you pay to get the lower rate, the longer it takes to recover the cost of obtaining that lower rate.  In simple terms if you pay an extra $1500 in fees and your monthly savings is only $15 per month, it will take you 100 months, or 8.3 years just to recover your initial payout.  Will you even own the home for 8 years?  If not, then you just threw money down the drain.

Here's the kicker...the VA restricts the types of fees that a VA buyer is allowed to pay.  So if your lender is charging high fees, you may have to negotiate for the seller to pay these items.  That's not so bad, right?  WRONG...a seller looks at their bottom line number when they are considering a buyer's offer, so chances are they will not negotiate as much on the price if they have to pay a bunch of extra fees.  Even worse, if there is a competing offer on the home you want, the seller may accept the other offer instead of yours.

If you compare lenders by simply comparing interest rates from one lender to the next, you will not be comparing apples to apples.  The key is to find a mortgage loan officer you can trust to structure a loan for you that best fits your needs.

Stay tuned to my blog, I will explain in detail the best tips for you to compare lenders to be sure that you get the BEST DEAL!

What is the benefit of a VA Loan?

The VA Home Loan offers 100% home financing for active duty military, eligible veterans, and in some cases, surviving spouses. There is no Private Mortgage Insurance (PMI) which allows for a lower monthly payment compared to other home loans.