Mortgage Rate Shopping Basics

Today's market offers a myriad of available program types, terms and features. Each of these products have their own set of qualification requirements and are priced according to the property type, its intended use and the creditworthiness of the borrower. Although the list of qualification criteria amongst these products is diverse, evidence of the borrowers ability to repay the loan is common to all of them. Determining which product you may qualify for requires knowledge of your past credit history, debt ratios and credits scores. If you are about to go shopping for the best rates on a mortgage loan, here are the basics that you need to be aware of before you begin...

APR
When you borrow money from a lender, the amount of money that you are borrowing and required to pay back is called the principle. The monthly payments required to pay back the loan are calculated by amortizing the amount of interest owed each month and the amount of principal being repaid together into substantially equal payments spread over the life of the loan. Lenders also charge various fees in addition to the rate used to amortize the loan.

The APR or "Annual Percentage Rate" includes not only the interest that has to be paid on a loan, but also some other costs associated with obtaining the loan such as points, prepaid interest and various lender fees. The APR therefore is intended to represent the true cost of mortgage loans.

For example, a 30 year, $100,000 loan with a 6% fixed rate, 1 point and no other lender fees has an APR of 6.0940 and $599.55 monthly principal and interest (P&I) payments. The APR is computed by first subtracting from the principal the "pre-paid costs" and fees required by the lender to obtain the loan . The result then represents the amount of money the borrower effectively has available for use. In this case $100,000 - 1% = $99,000 effectively available for use.

Next the amount effectively available for use ($99,000) is amortized over the life of the loan (30 years). By increasing the effective annual interest rate (APR) until the calculation results in a periodic payment equal to the payment amortized for the actual principal, the APR is computed. In other words a 30 year, $100,000 loan with a 6% fixed rate and monthly P&I payments of $599.55 has payments equal to a 30 year, $99,000 loan when the rate equals 6.0940% therefore 6.0940 is the APR.

While the APR is designed to make it easier for consumers to compare loans, unfortunately there are several shortcomings in the law that result in variations in APR calculations from lender to lender, even if the rates and actual cost in required fees are identical. One problem is that the federal law that requires lenders to disclose the APR does not clearly define which fees must go into the calculation. Each lender generally has their own set of fees with different fee names. Fees with one name might be included in the APR while fees of another might not be. Some lenders will lump all their fees together into one large single fee, perhaps calling it a "funding fee", while others might choose to charge a series of smaller fees, perhaps giving them names like "underwriting fee", "admin fee", "doc prep fee", "attorney fee", etc. So the end result is that lender "A" might be advertising a rate and APR combination that appear to be lower than lender "B", but in reality lender "B" might actually have the lower overall cost. The difference might be due to which fees, other than points, the lender chooses to include in the APR calculation.

If you would like to know which fees should be included in the APR computation on a Texas loan, the Texas Department of Savings and Mortgage Lending provides an APR Calculation Table to use as a guideline.

Another thing to be aware of is that APR will vary with loan amount if fees other than points are being charged. So in order for the APR to be meaningful in a comparison between the advertised rates of two lenders, either both advertised APR values would need to be based on the same loan amount and number of points or else you would need to know the total amount of all non-point lender fees being charged on at least one of the loans so that you could compute its APR on equal terms with the loan you are comparing to.

If your loan fits the criteria of an advertized loan, you'll find the calculator above extremely useful in your quest to find the best deal on a mortgage. It will help you determine the monthly principal and interest payment for your loan, your loan to value ratio (LTV) and even derive the estimated pre-paid finance charges & loan fees from the lenders advertized APR, provided that you click the checkbox and enter an APR value that is greater than the interest rate value.

Credit Scores & History
Most mortgage lenders will require that scores be established with the three major reporting agencies (Equifax, Experian & TransUnion) for the borrower. When more than one person is signing on a loan, the borrower is the person with the highest income and the other party is the co-borrower.

Mortgage lenders use a special type of credit report called a Tri-merge. It consists of the credit scores and credit history results obtained from each of the three major reporting agencies, merged together into a single report. The middle score and history of the borrower are used to meet the qualifying requirements of various mortgage loan programs. Generally speaking, the higher your score, the better the rates available to you and the lower the cost.

As of June 1, 2005 a new federal regulation entitles Texans to a free credit report once a year from each of the three credit bureaus. Unfortunately however, the free report does not include your scores. If you want to know your scores, they will charge you for that information. You can use the free report to determine what credit history is being reported and verify its accuracy. Be sure and have your printer available to print out the results. Here's the link... www.annualcreditreport.com

If you allow too many people to pull your credit when loan shopping, it will lower credit scores. So it's a good idea begin the process by first obtaining a Tri-merge credit report. By obtaining your own copy of your Tri-merge credit report, you can shop for the best offers with out impacting your score by simply providing the credit history and score information to potential lenders over the phone. You can obtain a Tri-merge at a discounted price using this link from our web site... https://ols.adin.net/creditlink/lendusa/creditlink.asp

Loan product categories, program types, terms and features
All mortgage loan products fall into one of two major categories, conventional or government loans. Within the major categories are sub-categories such as FHA and VA for government loans and conforming or non-conforming for conventional loans. Within each category, are different program types offering various terms and features whose benefits have varying appeal to consumers based on their individual circumstances. A typical loan that the consumer is likely to encounter in newspaper, magazine and web advertisements might be defined with criteria as follows;

Loans with a different set of criteria typically require the consumer to call in or pre-qualify over the web prior to being quoted a rate. This is especially true for loans in the non-conforming category. The first step in mortgage shopping is to compare the loan you are requesting to the one typically being advertised. If your loan is different, then you should expect to call or pre-qualify in order to obtain a rate and APR quote. If you don't know what type of loan you want, are not familiar with the various program types available or simply want to read additional information about loan program types, click here.