SOURCE: Carrington Mortgage Services

Carrington Mortgage Services

January 09, 2013 06:00 ET

If You Want to Save Money on a New Mortgage, It Helps to Start by Thinking of Ice Cream

SANTA ANA, CA--(Marketwire - Jan 9, 2013) - Go to the ice cream store and you'll pay so much per scoop. But the final price of your dessert will vary according to whether you want cones or cups and sprinkles or chocolate sauce. And when the store tallies your bill in most jurisdictions you'll also need to pay a tax to the local government.

Similarly, mortgage rates and costs vary according to your specific loan needs.

"The cost of a mortgage is partially represented by the interest rate," said Ray Brousseau, Executive Vice President with Carrington Mortgage Services, a lender active in more than 40 states. "But there are other expenses to consider and the result is that to get a good mortgage you have to look at all the costs in the transaction."

Interest Rates

Let's start with interest rates. Everyone surely wants the best available rate, but don't be confused by what appear to be wildly-discounted interest quotes. In fact, mortgage money is a commodity that's priced by the marketplace within a fairly narrow band at any given time. This means most mortgage quotes are likely to be bunched close together -- and if you see a rate that is strikingly low, then logic dictates that the loan being offered is not the same as other mortgage products -- or maybe a loan that is not available to most borrowers.

For instance, a fixed-rate loan is likely to have a somewhat-higher interest rate than an adjustable loan product -- but the fixed rate will stay in place for the life of the loan. A 15-year mortgage is typically priced below a 30-year loan but has higher monthly costs. An ARM with a one-year set rate will have a lower initial interest level than an ARM which has a fixed-rate for five full years.

Qualifying for the lowest rates also depends on a borrower's finances. Considerations such as cash, equity and credit are among the factors that count in the lending process, a reason why lenders spend so much time documenting loans.

"The best rates go to those with the best financial profiles," said Brousseau. "That makes sense in the marketplace and rewards the most qualified borrowers as well."

The APR

The APR or "annual percentage rate" is a standardized way to look at loan costs. It measures not only interest but also certain loan expenses. For instance, imagine that a loan from Lender Smith has an interest rate of 3.4 percent and a 4.5 percent APR. Lender Jones offers 3.5 percent but a 3.8 percent APR.

The Smith loan has a lower rate but far higher closing costs. The Jones loan has a higher rate but much lower closing costs. Which is the better mortgage? You have to consider issues such as how long the loan will be outstanding and how much cash you have up front when making a decision.

Pricing

At the ice cream store we saw that our order could be customized. The same can be said for mortgage interest. For instance, we might pay more up front in the form of "points" to get a lower rate over the life of the loan, or we might have the lender pay some or all the closing costs in exchange for a somewhat higher rate. Which is the better strategy? You have to look at your personal situation and consider things such as your finances, how long you expect the loan to be outstanding, and the lender's offer.

Closing Fees

When making a loan offer lenders will outline terms and conditions with a written form called a "good faith estimate" of closing costs or "GFE."

"It's important to review the GFE with the loan officer," said Brousseau. "Lenders generally feel that some fees are necessary and required to make the transaction work, but with individual mortgages there may be items that can be negotiated, funded through the loan or even waived."

Closing

The successful end of the lending process can be called closing, settlement or escrow. Whatever the name, the settlement will be summarized on the HUD-1, a form required by the federal government.

One of the most important expenses will be title insurance. When refinancing it may be possible to get a discount "reissue" rate if there has been a previous -- and recent -- title search.

Another big cost can be taxes. Alas, taxes cannot be waived, discounted or negotiated.

Lastly, while it's more about convenience than cash, there's a new closing trend that should greatly please borrowers.

"In many cases," said Carrington's Brousseau, "closing can be conducted from an individual's home. A qualified closing agent comes to the property and the entire transaction takes place at the dining room table. It's informal, comfortable and an option many borrowers now prefer."

And perhaps a good time and place to celebrate with a little ice cream when the last piece of paper is signed.

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