Last week we talked about the 4 reasons why you shouldn’t use APR when comparison shopping for a mortgage. So if you can’t APR, then how should you shop for a home loan?

It’s best to compare single variables on the Good Faith Estimates you receive. The Good Faith Estimate is the document you’ll receive from lenders that shows all the charges and fees associated with the mortgage loan.

While it’s easy to become overwhelmed when reviewing Good Faith Estimates, there are actually just two variables you need to consider:

1. The interest rate you receive from the lender.
2. The closing costs you’ll be charged by the lender.

On the first page of the Good Faith Estimate, about halfway down the page, you’ll find the “initial interest rate.” The closing costs are identified as “your adjusted origination charges.”

First, determine the type of loan program you want (e.g., 15-year fixed, 30-year fixed or adjustable). Then pick the variable that’s of most importance to you – the interest rate or the closing costs.

Shopping by Interest Rate

Determine the mortgage rate and lock-in period that you want; otherwise you’ll just be comparing apples to oranges. Also, you can’t just pick any rate. It needs to be fair and aligned with current market conditions.

When you talk to lenders, tell them that you’re comparison shopping. State the mortgage rate and lock-in period you want. Then ask them for their fees associated with your specific rate and lock-in period. Then add up ALL of the fees, including points (discount and origination) and other charges (e.g., processing and underwriting fee, mortgage insurance premium, appraisal fee, credit report cost, tax service fee, application fee, etc.). Note: You’ll have to convert points into dollar amounts.

If you want the lowest cost, pick the lender with the lowest fees.

Shopping by Closing Costs

If you want a low-cost loan, determine the maximum amount that you’re willing to pay on closing costs. When you talk to lenders, tell them this number and ask what their interest rate would be. For example, you might tell the lender “you want a zero-cost, 30-year, fixed-rate mortgage” and ask what their interest rate would be. Then pick the lender with the lowest rate. Note: Lenders may quote you an above-market interest rate since they won’t be receiving origination fees.

Whatever you do, pick one variable (interest rate or closing costs) when comparison shopping for a mortgage. Don’t comparison shop using both variables. Otherwise, you may end up overpaying.

By shopping around for your home mortgage, you can save yourself money by getting the best financing deal.

If you’re feeling overwhelmed when shopping for a home loan, or you want to get a Good Faith Estimate, or have questions about what's the best option for you, contact a trusted mortgage broker for assistance.