When a consumer sets out to seek a fixed mortgage product for home purchase financing, the first realisation is that interest rates will never change. Although many uninitiated to the practices involved when applying for a fixed mortgage believe rates are constantly changing, different lenders may offer different rates.
In Search of Par
Par in lending terms has nothing to do with the game of golf but the word is the same. The par rate is the lowest rate on a fixed mortgage requiring no payment of points. However, since the par rate produces no profit for the lender because it requires no cost to the borrower, you will never hear any lending institution quote this rate without accompanying loon fees, or points. A fixed mortgage lender seeks to sell a consumer a rate above this par so a profit is made. This is accomplished through passing along the costs for making the loan to the borrower in the form of these points.
It Comes Down to Closing Costs
When making fixed mortgage comparisons, keep in mind that all lending companies need to make a profit. Otherwise, they wouldn’t exist because these are not non-profit grant-giving programmes. This said, any savvy borrower will seek in negotiation to manage the amount of profit any of these companies make. Since most lenders “buy” money from the relatively same sources, these lending institutions should have nearly identical rates. The negotiation for finding a good fixed mortgage now comes down to the discussion of closing costs. Once you arrive at this situation, you are not negotiating loan costs to you, but rather profit margins for the lender.
How is This Accomplished?
Competition produces greater consumer value regardless the product. Therefore, it is most desirable to contact at least three-to-five reputable lenders asking each what is their par rate. Here is where your personal financial situation comes under scrutiny. Each lender will present to you the par rate for a fixed mortgage and then start adding on, and possibly subtracting, based on a series of questions posed. When a lender feels comfortable with the amount of personal information that gives them a full evaluation of your personal situation they will deliver an interest quote.
Higher Closing Costs, Lower Interest Rate
Once quoted a rate, a savvy borrower will ask the potential lender if the quote is the company’s par rate. Most loan professionals are not prepared for in-depth, fully knowledgeable negotiations. Here’s where the lender needs to understand the borrower’s desire to pay higher closing costs for the lowest interest rate with no points. If this lender offers such a quote continue to the others. If not – continue to the others.
Narrowing the Choices
Conduct this exercise with three-to five lenders. Throw out the highest and the lowest, the latter most likely a low ball come on that will result in high closing costs. Narrow down to two lenders with whom you feel comfortable asking for a “good faith estimate.” Now simply compare the closing costs outlined in the two separate quotes you have selected for consideration.
The lower of the two should be the lender selected for your fixed mortgage.
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