Assuming that your credit is good, your income is steady and there are no major reasons for a mortgage lender to deny you a loan, the most crucial information to consider when comparing one mortgage lender to another is what each loan will cost you, in the short term and the long term.
The majority of homebuyers in the U.S. are matched with their mortgage lender through an intermediary (a.k.a. middle man) known as a mortgage broker. While the broker’s network of contacts can help you find loan packages that may not have been available directly through a mortgage lender, the brokerage will also charge fees for its services. These fees may include the cost of document processing, as well as a flat fee for making the deal (typically a percentage of the mortgage loan amount).
In some cases, a broker may waive their fees in favor of a yield spread premium (YSP) from the mortgage lender. With this situation, the mortgage lender actually pays the broker for getting you to accept a higher mortgage rate! If the broker is collecting a YSP and charging you servicing fees, you could be getting ripped off by both the mortgage lender and the broker. [See related article “Predatory Tactics That Mortgage Lenders Use”]
The interest rate is usually the first thing homebuyers ask about after finding a mortgage lender ― but your mortgage rate is only the tip of the iceberg. The annual percentage rate (APR) measures what you will actually have to pay every year in interest as well as additional fees. A difference of 1% or more between the interest rate and the APR may indicate that the mortgage lender’s fees are too high.
Mortgage closing also involves a variety of up-front costs. One of these costs is called mortgage points, which can sometimes be paid to reduce the interest rate. Each mortgage point is equal to 1% of your mortgage loan balance. For this reason, it might be a good idea to pay the mortgage lender some points up-front because it can save you money in interest later on. [See related article “Paying Points on a Fixed Mortgage”]
You must also consider all the other up-front loan costs that the mortgage lender may require you to pay. These can include a credit check, appraisal fee, title search and title insurance, property taxes, homeowners insurance, and private mortgage insurance (PMI). PMI insures the mortgage lender in case you default on the loan and is generally required for loans that exceed 80% of the home’s value. [See related article "Understanding Escrow Accounts"]
You should weigh the pros and cons of various types of mortgage loans and consider the big picture when comparing mortgage lenders, rather than jumping at the deal that offers a slightly lower interest rate.