Comparing mortgage rates is easier today thanks to the standardized Good Faith Estimate courtesy of the Department of Housing and Urban Development. The new Good Faith Estimate outlines your closing costs simply making it easier to shop from today’s best mortgage lenders. Here’s how to use the new disclosure form to make the best home loan interest rate comparison.
Get a Better Home Loan Interest Rate Comparison
Finding the best mortgage rates with the lowest out-of-pocket fees can be confusing. Do you know the difference between processing fees and document fees? Do you know how Yield Spread Premium (yes it still exists) affects your loan origination fee?
The most common mortgage mistake your neighbors make with their home loan interest rate comparison is looking at rates and fees across different programs. The first thing you should do when shopping for a home loan is understand and choose a program. Once you’ve decide which program is best for you stick with it and don’t let a fast talking loan officer talk you into changing.
Understanding Your Good Faith Estimate
The problem in the past was that lenders cooked up different names for their fees to make home loan interest rate comparison shopping confusing. One would call it a processing fee the other an application fee. The new Good Faith Estimate standardizes lender fees and terms.
Your mortgage loan program and any “gotcha” fees like the prepayment penalty are clearly disclosed.
According to the government the new Good Faith Estimate saves you $700 just by eliminating the shady names lenders used to confuse homeowners.
Here are 4 steps to follow for the best home loan interest rate comparison shopping:
- Shop Smartly For Interest Rates & Fees
- Shop With Accurate Mortgage Rate Quotes
- Use Your GFE’s Shopping Chart
- Avoid Focusing Only On Mortgage Rates
It’s impossible to make an apples-to-apples comparison of interest rates and fees on your Good Faith Estimate if you’re comparing home loans across different programs. Once you’ve decided that a conventional 30-year fixed rate mortgage is right for you don’t let a shady loan officer confuse you by quoting rates and fees from a 7/1 ARM. If you confuse the issue by comparing across different programs you’ll overpay at closing every time.
Many homeowners refuse to give their social security number when shopping because they’re afraid the quote will damage their credit. While it’s true that your credit score will take a hit by having a mortgage lender run your credit you can manage the impact by limiting inquires to a two week period.
If you do this you’ll only get dinged once. Also, when requesting mortgage quotes during this two week period always provide your social security number to ensure you’re getting an accurate quote. If you don’t provide your SSN the best you can hope for is that lender’s advertised rate or worse yet someone’s guess.
Page three of your Good Faith Estimate has a chart you can fill out to make a home loan interest rate comparison across different lenders. Once you fill out the chart at the bottom of page three you can compare loan characteristics and fees from up to four lenders. Be careful when using the shopping chart as some of the questions might tempt you to compare home loans across different programs which is a mistake.
Many homeowners get so caught up on chasing the lowest mortgage rates that they overlook fees. The fees you pay at closing make or break the deal you’re getting. If you focus only on mortgage rates at the expense of discount points and the loan origination fee you’re guaranteed to lose money.
The fees you need to focus on are found on page two of your Good Faith Estimate. The loan origination fee and any Yield Spread Premium are found in section A box 1 and 2. Did someone mistakenly tell you Yield Spread Premium is illegal now? Look at box 2: “The credit or charge for the interest rate of X% is included in our origination charge. (See item 1 above.)”
This is Yield Spread Premium and it’s perfectly legal. If you’re getting a credit towards your loan origination fee you might think that it’s less cash coming out of your pocket; however, you’re accepting a higher mortgage rate for the credit which means a higher payment.
The loan origination fee in box 1 is important and can save you a significant amount at closing. Many brokers will tell you that one percent is standard but I’ve reviewed community credit unions that charge as little as $400 for loan origination. The less you pay the better the deal you’re getting on your next home loan.
Shopping smartly is the best strategy and using the new Good Faith Estimate’s home loan interest rate comparison table to compare fees can save you thousands of dollars at closing.
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My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
