Shopping around for the best mortgage deal can be overwhelming. We would like to explain a few things that will help you simplify this process and help you eliminate all of the stress and confusion that you may experience while comparing rates and fees with various lenders. If you want to skip all of the technical stuff, you can scroll all the way to the bottom and get the simplified version of how it all works.
Where Do I Start? How To Shop For a Mortgage
There are lot’s of disclosures when applying for a mortgage but for now you can disregard all of them and essentially focus on only one document. That document is called the “Good Faith Estimate” or sometimes referred to as the “GFE’. This document will tell you everything you need to know about the interest rate and fees that the lender is charging you. It is the only document that you’ll when shopping for the best mortgage deal.
What is a “Good Faith Estimate”
The Good Faith Estimate is a preliminary estimate on all fees and loan terms such as the interest rate, term, loan amount, fixed/adjustable, etc. This document is standard across the country so Colorado residents will be looking at the same document as someone who lives in New York.
How To Read a Good Faith Estimate
The GFE is a very thorough 3 page document but only a few parts are actually important when shopping around for the best mortgage deal. Below, we will be providing screenshots of what you need to focus on and you can also print out a full Good Faith Estimate here.
Part 1/Page 1 of the GFE(1st Important Part)
On page 1 you will find the summary of your loan. This will give you the loan interest rate, the length of the loan, the type of loan(fixed or adjustable) and whether the loan has a balloon or prepayment penalty. Review page 1 to make sure the interest rate and the terms are as you have requested.
Part 2/Page 2 of the GFE(2nd Important Part)
Now that you’ve compared the interest rate, we can move on to the closing costs on page 2. The screenshot above is where you will be comparing the lender fees. Box 1 is the origination charge which is the fee that the lender is charging you. Box 2 will show you if you’re getting a credit or paying points. Box A(adjusted origination charges) is the combination of Box 1 and Box 2. When shopping for the lowest lender fees, Box A – “Adjusted Origination Charges” will be the number you want to compare between all the lenders. Do not compare Box 1 or Box 2 because it doesn’t reflect any credits or points.
BOX 2 – Getting a CREDIT
If you are receiving a credit for the rate you have chosen, that credit will go in Box 2. As we mentioned previously, the credit will offset Box 1. IMPORTANT – If you are receiving a credit, it is possible that the credit(Box 2) will exceed the Box 1 resulting in a negative number in Box A. The negative number means the lender is not charging any lender fees and the remaining credit in Box A will go towards other 3rd party fees such as title insurance, etc. NOTE/TIP – If you are being offered a no-cost mortgage, Box A cannot be a positive number. It must be zero or negative.
BOX 2 – Paying POINTS
If you are paying points or buying down the rate, that number will go in the “You pay a charge of $$$ for this interest rate of _%”. In this case you would add Box 1(Our Origination Charge) plus the points/charge(Box 2). The sum of those 2 numbers is how much you’re paying in lender fees. Keep in mind that this does not include any 3rd party fees such as title insurance or escrow set up.
What’s the Difference Between Box 1(Our Origination Charges) and Box A(Adjusted Origination Charges)
Let’s say that mortgage company ABC is charging you $7,000 in Box 1 and mortgage company XYZ is only charging you $3,000 in Box 1. Although it would seem that company ABC is charging you more money, you have to compare the credit and/or charge from both companies. Company ABC may be giving you a credit to offset that $7,000 and company XYZ may not be giving you a credit for their $3,000 Box/Line 1 origination. This is why you always look at Box A(Adjusted origination charges) when comparing lender fees.
The Short Version
When shopping for a mortgage, you need to request a “Good Faith Estimate” from the lender. You are comparing only 2 things – the interest rate and the ADJUSTED ORIGINATION CHARGES or BOX/Line A on page 2. All other numbers/estimates on the good faith estimate will essentially be the same with every lender including escrow set up and title charges. Although you can always shop for your own title company, most title companies have similar fees so there is really not much to shop for there. Don’t get overwhelmed when comparing Good Faith Estimates. Focus only on the 1)Interest Rate and 2)ADJUSTED ORIGINATION CHARGES. The lender with the lowest ADJUSTED ORIGNATION CHARGES and interest rate is giving you the best deal.
Is It Just About The Rate and Fees?
Although shopping for the lowest interest rates and fees is crucial when finding the right lender, other factors such may also be important. Besides having different rates & fees, lenders will have different programs and guidelines that may impact the client’s decision. In some cases, the client’s financial situation may limit him/her to working with only a certain lender(s). Location may also play a roll when considering which lender to chose.