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Why you shouldn't go to your regular bank for a mortgage


People like to follow their basic habits most of the time. When we buy something, we like to try different brands, different fashions or, at least, different stores. But when the time comes, we often knock the door of our regular bank regarding mortgage or refinancing home loan.

Now, that’s a mistake!!

Why is that a problem? Because, mortgage interest rates on a 30-year fixed-rate mortgage may vary among different lenders by more than a percentage point. That means the difference may be greater than $70 per month on a loan of $250,000.
So yes, it's wise to shop around before thinking about a mortgage.

Big variations among lenders

Practically there’s nothing bad with obtaining a mortgage from your regular bank. Maybe they are offering the best rate and terms for your credit and financial profile. But, the odds are against it - there's so much difference in the rates and terms offered by different mortgage lenders that your regular bank can’t cope up with them to provide you the best deal.

Differences in interest rates are only one factor to consider when shopping for a mortgage. The following are some other reasons to consider loans offered by different lenders rather than what your regular bank is offering:

1. Fee structure

All mortgages include fees, which you can name them as closing costs. These are additional charges the lender adds on in part to cover expenses associated with the loan, such as legal filings and obtaining credit reports, but also as its own fee(s) for originating the loan. That's how they usually earn their money as interest typically sent to investors who purchase the loan as part of a package of securities.

2. Discount Points

Discount points, normally named as points," are a separate type of fee. Most lenders will provide you the option of buying a lower interest rate by paying for points. Each point costs 1 percent of the loan amount and it’ll reduce your interest rate by ⅛ to 1/4 of a percent.

If you compare different lenders together, you first need to compare offers excluding points. That makes it easier to make a comparison of the basic costs and interest rates. Then check and figure out the points, if you want to do so.

3. Down payment

Down payment requirements may vary from lender to lender. One lender may check your application and approve for 10 percent down while another may approve your application with only 5 percent down.

One example of this is the new loan programs authorized by Fannie Mae and Freddie Mac that require only 3 percent down on 30-year loans for borrowers with good credit. However, right now all lenders are not offering this product. So, if you're interested in a minimal down payment except going for FHA loan, your regular bank may not provide this particular loan type.

4. Flexibility

Once you've started the application process, how much options do you have if things need to change? For example, some lenders will allow a one-time adjustment if mortgage rates should fall after you lock in your rate. Some may charge a fee for doing this; others will not. Some banks won't change a locked rate at all. So, for getting your desired flexibility, you have to go for different options rather than your bank.

5. Loan programs

Your regular bank isn't going to tell you regarding mortgage options they don't offer. They want to make business with you more than anything else. But, other lenders may offer loan options that are better for fulfilling your needs.

Example 1 - A USDA Rural Development Loan is relatively offered by few lenders. You generally have to contact your local USDA office for getting a list. But if you're a first-time homebuyer who can’t fulfill the income criteria and other qualifications, these no-money-down loans are tough to beat.

Example 2 - It would be portfolio loans. These are mortgages that lenders keep on their own books, or sell them to investors they have a direct relationship with, rather than channeling them through Fannie Mae, Freddie Mac, the FHA or another agency.

As a result, the lender gets full authority to set its own guidelines rather than following the rules set by an agency. This can render more flexibility for borrowers who can’t or don’t want to fulfill the requirements for conventional loans. Portfolio loans are often popular among businessmen who have difficulty documenting their income or don’t wish to reveal their accounts to outsiders, but can prove their creditworthiness at any cost.

Another example might be someone who experiences a recent bankruptcy and has returned to his normal financial situation, but can't qualify for an agency-backed loan. Or anyone who is financially strong but can't cope up with the strict criteria for a conventional loan.

Choosing a lender

When shopping for a mortgage, you should start checking with from a variety of lenders. You should check with big banks, community banks, credit unions, and mortgage brokers to get what facility they're offering. Then make it short and ask them to provide detailed quotes and price breakdowns of what they're willing to offer.

You don't even have to go to a lender who has an office in your area. Today, mortgages are available and applied for online with relevant papers and information submitted electronically.

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