Comparing loans from multiple lenders can be difficult.
Interest rates and closing costs will vary from lender to lender. Some have lower rates but higher fees.
So how do you compare loans to determine which one is the better deal?
This article shows you how to compare loan offers from multiple lenders to know which loan is best.
Comparing Loan Quotes
Because lenders charge different interest rates and lender fees, comparing the true cost of mortgage loans can be challenging.
It’s easy to compare multiple loan offers using our loan comparison calculator.
As an example, let’s say John is buying a $200,000 home and has a 10% down payment. He gets three quotes from three different mortgage lenders.
Loan 1: $180,000
- 5% interest rate
- 1% origination fee
- $2,500 closing costs
- $966 Monthly payment
Loan 2: $180,000
- 4.5% interest rate
- 1% origination fee
- $5,000 in closing costs
- $912 Monthly payment
Loan 3: $180,000
- 4% interest rate
- 1% origination fee
- $10,000 in closing costs
- $859 Monthly payment
Which loan is the best deal?
As you can see in the figure above, loan 3 will save the borrower $30,995 over the loan course.
To find this out, we will need to look at the annual percentage rate or APR. This gives buyers the true annual cost of the loan. The APR should be disclosed in the loan estimates, but we will use our loan comparison calculator to compare these loan quotes.
Annual Percentage Rate
The APR includes interest, up-front fees, and any other costs associated with a loan. The annual percentage rate will be higher than the interest rate because it includes all the loan costs to give you the loan’s true annual cost. The APR is the best way to compare loans with different terms.
Getting the Best Rate
The interest rate on a mortgage is critical because it is such a large loan amount. Even just a quarter of a percent can add up to tens of thousands of dollars over the course of the loan.
You should always get loan quotes from at least 3-4 different lenders to make sure you’re getting a competitive interest rate. These loan quotes can also help you negotiate the rate down.
The most important factor in determining the rate on a loan is the borrower’s credit score. The higher the score, the lower the interest rate will be, and vice versa. Before applying, you should work on increasing your credit score.
A common way consumers can increase their score is by paying your credit card debt. Trying keeping your card balances below 20% of their credit limit to maximize your credit rating.
Closing costs are fees charged by a lender for funding and processing the loan. Closing costs will vary depending on the lender; you can expect to pay between 1%-6% of the loan amount. You can even find no closing cost mortgage loans, but these loans often have inflated interest rates to make up for the lost revenue of closing costs.
Most types of loans allow the seller to pay a portion of the homebuyer’s closing costs; ask your lender for more details on seller paid closing costs.
You may be able to negotiate lower closing costs. Below is a breakdown of what is included in these costs.
Items Included in Closing Costs
- Loan Origination fee (1%-3% of the loan amount)
A fee charged by lenders for processing the loan.
- Discount points (1 point is equal to 1 percent)
A form of pre-paid interest that will lower the interest rate on the loan.
- Appraisal Fee ($350-$750)
Lenders require a professional home appraiser to assess the property value.
- Credit report (Free – $50)
Some lenders may charge a small fee for ordering your credit report; this may be negotiated.
- Title Search ($75 – $100)
Lenders hire 3rd party companies to ensure there are no liens or taxes owed on the home. This policy protects the borrower and the mortgage lender.
- Title Insurance Policy ($300 – $750)
Title insurance is required for mortgage loans to cover issues with the title.
- Underwriting fee ($400 – $900)
- Underwriters make sure all documents are ready to be processed.
- Pre-paid property tax – Property taxes for the year are due at closing. You will be charged a pro-rated amount for the year.
- Home Inspection ($300 – $600)
Home inspections are not required but are highly recommended to uncover any issues in the home.
- Courier ($20 – $75)
If the lender needs to send you documents with a courier, you will be charged the fee.
- Survey ($300 – $600)
A licensed surveyor will check the property for accurate property and boundary measurements.
Don’t make the mistake of getting a loan with the first lender that approves you; get loan quotes from at least 3 different lenders.
By comparing loan quotes from a handful of lenders, you will be sure you are getting the best deal possible on your loan.
Work on improving your credit score before applying to get the best rate possible and negotiate closing costs.
Are you thinking about refinancing or getting a mortgage?