How to save thousands on your mortgage

A no-nonsense guide for first-time homebuyers

To a first-time homebuyer, securing a loan for the home of your dreams often feels complicated, burdensome, and even frightening. What lender should I choose? What kind of loan do I need? How do I know if I’m getting a good deal? Am I in danger of not being approved? Many questions need answering, and most borrowers just don’t have the early information they need to achieve peace of mind.

This guide cuts through the mortgage industry's intentional complexity to help you save serious money on your home loan. We’ll explore the standardization of Loan Estimates, the critical importance of shopping around (including the CFPB's recent push for this practice), and key steps in the mortgage process. You'll learn how to use tools like Fincast to your advantage, understand the pros and cons of working with real estate agents, and navigate potential conflicts of interest in the home buying process. We will also delve into the history of unethical practices in home inspections and why staying vigilant is crucial. Armed with this knowledge, you could potentially save tens of thousands of dollars over the life of your loan and avoid common pitfalls in the home-buying process.

Table of Contents

1. Understanding Loan Estimates: Your Key to Savings

2. The Power of Shopping Around: The CFPB's Game-Changing Stance

3. Rate Locking: A Tool for Savvy Buyers

4. Don't Overlook Closing Costs

5. Crucial Steps to Save on Your Mortgage

6. The Hidden Costs of Homeownership

7. Navigating Your Home Buying Team: Benefits, Risks, and Red Flags

Understanding Loan Estimates: Your Key to Savings

Loan estimates are the mortgage industry's version of a price tag, but they're often unnecessarily complex. Here's what you need to know:

The Standardization of Loan Estimates: A Win for Consumers

Before we dive into the details, it's crucial to understand a bit of history. Before 2015, there was no standardized format for loan estimates. This lack of uniformity made it incredibly difficult for consumers to compare offers from different lenders effectively.

In the wake of the 2008 financial crisis, the Consumer Financial Protection Bureau (CFPB) was established. One of their key initiatives was to bring transparency to the mortgage process. In October 2015, the CFPB implemented new rules requiring all lenders to use a standardized Loan Estimate form.

This change was a game-changer for consumers. Before standardization, lenders could present information in ways that often obscured true costs or made comparisons nearly impossible. Some would highlight low interest rates while burying high fees in fine print. Others might use confusing jargon or present costs in different timeframes (monthly vs. annual) to muddy the waters. Only the worst of the bad actors would outright lie within their estimates, but there were no laws preventing the less scrupulous lenders from intentionally confusing customers with skewed data or overly complicated explanations.

The standardized Loan Estimate form forces lenders to present key information uniformly, making it much easier for you, the borrower, to shop around and compare offers effectively. It's a powerful tool in your arsenal, but only if you know how to use it.

What a Loan Estimate Includes

• Interest rate

• Monthly payments

• Closing costs

• Other fees

Why it Matters

A seemingly small difference can have a big impact. For example, a 0.25% difference in interest rates on a $250,000 loan can save you over $12,000 over 30 years.

How to Use Loan Estimates Effectively

1. Get estimates from multiple lenders.

2. Compare interest rates, total loan costs, and any special fees or conditions.

3. Remember, the lowest interest rate isn't always the best deal. Look at the whole package.

By understanding how to read and compare Loan Estimates, you're taking advantage of a tool specifically designed to help consumers like you make informed decisions. Don't let the complexity deter you – this standardized form is your key to potentially saving thousands over the life of your mortgage.

The Power of Shopping Around: The CFPB's Game-Changing Stance

In recent years, the Consumer Financial Protection Bureau (CFPB) has taken a strong stance on the importance of shopping around for mortgages. This position wasn't arrived at lightly – it's the result of extensive research and a commitment to consumer protection. Let's explore how this came about and why it matters to you.

The CFPB's Eye-Opening Study

In 2015, the CFPB conducted a comprehensive study on mortgage shopping behaviors. The results were alarming:

• Nearly half of consumers didn't shop around for a mortgage at all.

• Among those who did shop, most only considered a single lender.

• Consumers who obtained quotes from multiple lenders could see interest rate variations of up to 0.5 percentage points.

From Research to Action

Recognizing the significant financial impact of these findings, the CFPB launched its "Know Before You Owe" campaign in 2018. This initiative wasn't just about providing information – it was a call to action for consumers to take control of their mortgage process.

The CFPB created a toolkit to help consumers compare loans effectively and began strongly advocating for shopping around as a key strategy for saving money on mortgages.

Real-World Impact

To understand why the CFPB is so insistent on shopping around, consider this example:

Two borrowers, Alex and Sam, are both seeking a $300,000, 30-year fixed-rate mortgage:

• Alex accepts the first offer they receive at 4.5% interest.

• Sam diligently shops around with different lenders and finds a rate of 4.0%.

Over the life of the loan, Sam will pay approximately $30,000 less in interest than Alex. That's $30,000 that could go towards retirement, their children's education, or other financial goals.

The CFPB's Current Stance

Today, the CFPB consistently advises consumers to:

1. Shop around with at least three different lenders.

2. Do all your shopping within a focused period (generally 14-45 days) to minimize the impact on your credit score.

3. Don't be afraid to negotiate and ask lenders to compete for your business.

By promoting these practices, the CFPB aims to create a more competitive mortgage market, ultimately benefiting all consumers. Remember, in the world of mortgages, an informed consumer is a powerful consumer.

Rate Locking: A Tool for Savvy Buyers

Rate locking is a powerful tool that the industry doesn't always explain clearly. Here's what you need to know:

• It guarantees your interest rate for a specific period.

• It protects you from rate increases.

• It shows lenders that you're serious, potentially encouraging better counter-offers.

Example: By locking in a 4% rate with one lender, a buyer received a counter-offer of 3.875% from another, potentially saving up to $10,000 over the loan term.

Don't Overlook Closing Costs

Closing costs are often glossed over within the ‘big picture’ of a loan, but how these costs are calculated and packaged within your loan can significantly impact your total expense. These fees can add up, but an informed customer can often negotiate these as well.

Common closing costs include:

• Appraisal fees

• Title search fees

• Loan origination fees

• Attorney fees

—-

How Fincast helps: It compares the total cost of your loan, including closing costs, giving you a true picture of your mortgage expenses.

—-

Crucial Steps to Save on Your Mortgage

When you’re ready to make the leap and begin the process of securing your new home, driving to the nearest bank to start talking numbers isn’t the first thing you should do. There are several steps you can take that will prepare you for the process - and the questions you will receive - before you ever set foot inside a prospective lending partner’s building:

1. Start saving early for your down payment

   • Aim for at least 20% to potentially avoid private mortgage insurance (PMI).

   • A larger down payment can lead to better interest rates.

2. Check and improve your credit score

   • Higher scores often mean lower interest rates.

   • Pay bills on time, reduce credit card balances, and avoid new credit applications.

3. Get pre-approved before house hunting

   • Gives you a clear budget.

   • Makes your offer more attractive to sellers.

   • Use Fincast to streamline pre-approval with multiple lenders.

4. Avoid large purchases before closing

   • Big purchases can impact your debt-to-income ratio and credit score.

   • Lenders recheck your financials before closing; changes could delay or cancel approval.

5. Always read the fine print

   • Understand terms like interest rate, APR, loan term, and prepayment penalties.

   • Use Fincast to get clear comparisons and simple explanations of complex mortgage jargon.

Navigating Your Home Buying Team: Benefits, Risks, and Red Flags

Working with professionals can be invaluable in the home buying process, but it's crucial to understand both the advantages and potential pitfalls. Let's focus on real estate agents and why maintaining independence in your choice of service providers is critical.

Pros of Working with a Real Estate Agent:

1. Market Expertise: Agents often have in-depth knowledge of local markets, pricing trends, and neighborhood characteristics.

2. Negotiation Skills: Experienced agents can negotiate effectively on your behalf, potentially saving you money or securing better terms.

3. Access to Listings: Agents may have access to properties before they hit the public market, giving you a competitive edge.

Cons of Working with a Real Estate Agent:

1. Cost: While typically paid by the seller, the agent's commission is often factored into the home price, potentially increasing your overall cost.

2. Potential Conflicts of Interest: Agents are incentivized to close deals quickly, which may not always align with finding you the best value or most suitable property.

3. Limited Scope: Agents may not be experts in all aspects of home buying, such as financing or home inspection, yet may offer advice in these areas.

The Danger of Relying Solely on Agent Recommendations

It's common for real estate agents to recommend specific lenders or home inspectors. While these recommendations can be helpful, they can also present significant conflicts of interest.

The Home Inspector Referral Scandal

In the early 2000s, a troubling practice came to light: home inspectors were paying real estate agents for referrals. This created a serious conflict of interest. Inspectors who found too many issues with a property risked losing future referrals, potentially leading to less thorough inspections.

The consequences of this practice were severe. Many homebuyers found themselves with unexpected and costly repairs shortly after purchase, having relied on inspections that were compromised by financial incentives.

In response to this scandal, many states took action. For example, in 2002, California passed a law prohibiting home inspectors from paying referral fees to real estate agents. Other states followed suit, and the National Association of Realtors eventually advised against the practice nationwide.

This history underscores the importance of choosing your own home inspector, independent of your real estate agent's recommendations.

Misaligned Incentives in Lending

Similar conflicts can arise with lender recommendations. Some real estate agencies have affiliated business arrangements with lenders or receive indirect benefits for referrals. While these relationships aren't inherently unethical, they can limit your options and potentially lead to higher costs.

Protecting Yourself: A Checklist

1. Always shop around for lenders, even if your agent recommends one. Use tools like Fincast to compare offers objectively.

2. Choose your own home inspector, independent of your agent's suggestions. Look for certifications and read reviews from previous clients.

3. Ask your agent to disclose any financial relationships with recommended service providers. They should be transparent about any potential conflicts of interest.

4. Don't be afraid to seek second opinions or independent advice, especially on major decisions.

5. Remember that while your real estate agent can be a valuable partner, you're in charge of your home-buying journey. Stay informed and advocate for your interests.

By understanding these dynamics and potential conflicts, you can navigate the home buying process more effectively, potentially saving thousands of dollars and avoiding costly mistakes.

The Hidden Costs of Homeownership

Congratulations, you’ve secured the loan you needed and everyone has signed on the dotted line to make your housing dream a reality! Now is not the time to be blindsided with other realities that commonly face homeowners; namely, that your mortgage payment isn't your only expense when owning a home. Be sure to budget for:

• Property taxes

• Homeowners insurance

• Maintenance and repairs

• Utilities

• HOA fees (if applicable)

Research average costs in your target area and do your best to build an emergency fund for unexpected repairs. Just like a car, parts of your house will break down with age. Planning for these inevitable repairs and replacements will help ensure that your new home doesn’t become a headache.

Conclusion: Empowered Home Buying

The mortgage and real estate industries often profit from complexity and misaligned incentives. By understanding the process, shopping around diligently, and maintaining independence in your choices, you can potentially save tens of thousands of dollars over the life of your loan and be secure in the knowledge that you're making the best decisions for your future.

Remember, you're not just finding a house – you're making one of the biggest financial decisions of your life. Stay informed, be prepared, and don't be afraid to ask tough questions at every step of the process. With the right knowledge and approach, you can navigate the complexities of home buying and emerge with a great deal on a home you love.