How Can A First Time Homebuyer Compare Mortgage Costs?

the interest rate and the APR when shopping for a loan. While these are indeed very important aspects of the loan, they may not even be the most important for a first time homebuyer. Comparing the Good Faith Estimate provided by the lender can help a first time homebuyer determine if they are really giving you a good deal or if they are trying to taking you to the cleaners. This article is about how a first time homebuyer can use the Good Faith Estimate to compare lenders' costs, but remember there is a huge difference between getting the best costs and getting the best loan.

Within three days after applying for a loan, by law the lender must provide you in person or in the mail a completed Good Faith Estimate. This is a form that represents an estimate of the fees and costs of necessary items to successfully process and close your mortgage loan. These items include origination fees, discount points and other fees. The Good Faith Estimate is normally a legal sized form that is divided into six different categories. These categories are numbered 800, 900, 1000, 1100, 1200, and 1300. It will be accompanied by a Truth in Lending statement that gives you the APR on the loan as well. You should pay some attention to the Annual Percentage Rate, but keep in mind that this is a figure that is easily manipulated and makes some very bad assumptions. APR assumes zero inflation and that the value or buying power of a Dollar today will be exactly equal to the value of a Dollar even 30 years from now. More significantly, the APR calculation assumes that the mortgage will never be paid off early. This is completely unrealistic. Very few first time homebuyers (or other borrowers for that matter) last longer than 5 years without refinancing or selling. So APR is a very poor method of comparing loans. When comparing Good Faith Estimates focus on the section that relates directly to the lender.

Sections 900 through 1300 of the Good Faith estimate are the where third party charges and fees are listed. The lender has only minimal control over these. Sections 900 and 1000 are items required by the lender to be paid in advance or deposited with the lender. This section is where you set up your accounts to pay the taxes, hazard insurance and mortgage insurance and also where you pay your prepaid interest on the mortgage. Although it says 'required by the lender", these charges are specific to the loan program and not the lender. At closing, they will be the same with every lender.

Section 1100 is where the charges from the closing attorney or title company will be. These will be controlled by the closing agent and not the lender. Most of the time, this closing attorney or title company will have been chosen by your real estate agent. You may notice that these fees vary between lenders. This is because the lender is the one that prepares the Good Faith Estimate for you. The lender will estimate these charges based on what these items typically cost. The lender has no control over items in these sections so disregard comparing these when comparing lenders. However, do take note if one loan officer has significantly lower fees in these sections than others do. Some lenders may try to trick you by giving low figures for the third party fees so that their higher lender fees on their Good Faith Estimate will even out. Then when you have to pay extra money at closing, they tell you their numbers are just an estimate, and your agent requested an expensive attorney.

Section 1200 includes all the government related taxes and recording fees. Again, these should be the same regardless of the lender so there is no reason to use these as a comparison. However, if a particular loan officer is significantly wrong on these items, you may want to find out how experienced they really are.

We skipped over section 800 until now because this is the one that includes the items to really compare. These are the charges and fees that relate directly to your particular lender. This is where a first time homebuyer should really focus and review items to make comparisons. This section may include administration fees, application fees, document preparation fees, funding fees, mortgage broker fees, processing fees, underwriting fees, wire transfer fees and any other fees that a lender might be charging. These can be confusing for a first time homebuyer. The key thing you must do here is simply ask why each fee is there and get a reasonable explanation. A competent loan officer will be able to explain these to a first time homebuyer and why each one is there.

Remember, it is vital that you look at the total package and not just focus on the interest rate. Unfortunately, first time homebuyer loans can be complicated and have several moving parts. These can be altered to make one part look more attractive if necessary. A lender can make any part of the loan attractive if they feel that is what is really important to you. For example, one lender may offer a $300,000 loan a half point lower but may have $3,000 in extra fees added in the Good Faith Estimate. Because of the ridiculous assumptions required by law to be used to calculate the APR, this loan may also have a lower annual percentage rate than a loan with lower fees and higher interest rates! So as a first time homebuyer, be sure to spend some time talking over the good faith estimate with your loan officer. Ask questions. Compare the entire package together to see which is really the best deal. In that conversation, take the time to get a feeling for whether your loan officer has your best interest at heart. A good loan officer, who understands the needs of a first time homebuyer, will take the time to put the numbers on that good faith estimate and fit them into the total context of your life.