The many different available mortgage options make comparing your offers from multiple companies more difficult than it needs to be. We’ll show you how to compare mortgage quotes to ensure that you’re getting the best possible deal.
Mortgage quotes have several basic pieces which make up the contract as a whole. Because there are so many different options, a mortgage can be structured in an infinite number of ways. Here are the things you should check against your mortgage quote to see if you have a true, apples-to-apples comparison:
Duration – The most basic qualifier for any mortgage is the amount of time the mortgage loan lasts. For example, a mortgage based on a 30 year repayment term is not the same as a 15-year mortgage; as the payments will be lower, even if you pay more over time. In some cases, the duration of a loan can be made muddy or confused. A 5/1 ARM, for example, lasts only one year, after which the loan is wound down and a refinance needs to be done. But the payments you make on a 5/1 ARM aren’t enough to pay off the home in just 5 years. In fact, most are based on a 30 year repayment schedule, which makes them a 30-year loan.
Fixed rate – A fixed rate loan is easy to compare to another fixed rate loan. The loan’s rate is published and made available to you, and therefore it can be compared to other fixed rate loans easily. The lower the number of the interest rate the cheaper the loan will be.
Variable rates – Variable rate loans can be more difficult to compare. First, you’ll want to see how the mortgage company calculates your interest rate. A majority of lenders will look to the Wall Street Journal for its publication of the “prime rate,” which is the rate at which US banks lend to other US banks. The bank will then mark up this rate with a few extra percentage points to cover its risk and potential profit. Some loans, however, allow for more adjustments than others. A 5/1 ARM, for example, allows the bank to change the rate only once per year. Other loans allow the bank to change the rate 4 times per year, or even monthly, based on the published prime rate. In general, it’s hard to compare these easily unless you know the possible rate increases or decreases in the prime rate, as if the rate moves quickly a slower adjusting mortgage would be best. If the rate moves slowly, then an infrequently adjusted rate would do better. Your best comparison here is to compare the variable rate calculation to the other.
Points – Points are fees charged either to cover the cost of the mortgage brokers’ expenses, or to pay down future interest rates. In general, compare the upfront cost of any points to the long-term cost savings in a lower monthly payment. If, for example, one loan costs $1,000 upfront, but is $50 less expensive per month than another loan, then the payoff date is only 20 months, or less than two years. This loan would make the most sense should you live in the home for more than 20 months, or do not plan to refinance within the same period.
At the end of the day, comparing two mortgage quotes means you must consider possibilities which are nearly impossible to predict. Interest rates, your future, and how long you plan to stay in a home don’t always work out to plan. To save on the headache and hassle of mortgage mathematics, compare only fixed-rate loans to fixed-rate loans, and adjustable rate loans to adjustable rate loans. Duration should be the same, as well.
Pending that you follow this simple wisdom, you’ll end up with the best mortgage for your money, without having to bother thinking about externalities you simply cannot control.