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Comparing Your Choices

The next step after canvassing lenders is to compare your options (see Figure 5.8).

Question: After you have made your telephone calls and filled out the shopping list, how do you select one loan and lender from among the many choices?

Answer: By process of elimination. The price that you pay for a loan is a combination of rate, points, and fees. Price comparisons are tricky, and unfortunately there is no way to make good comparisons without resorting to some arithmetic. Comparing the prices to choose a lender is a four-step process:

• Sort your list of loans by rate and points.

• Eliminate the obviously high-priced loans.

• Calculate effective rate for remaining loans.

• Choose a low-rate loan from a reputable lender.

When you have completed your telephone calls, you will have a list of 15 to 25 loans. To make the example in Figure 5.9 simpler, we have listed just eight of them.

Figure 5.9 shows the loans in the same order as they came from the shopping list. Note that the rates are expressed as decimals rather than fractions. This makes the arithmetic easier. Use the following conversion table if lenders quote rates in fractions:

FIGURE 5.9 Sample Shopping List: Gather Information

Sample Shopping List: Gather Information

First, after you have finished canvassing the lenders, sort your list of quotes by rate and then points (see Figure 5.10). You usually find that the mortgages with the lowest rates will have the most points.

The next step is to eliminate the loans whose rates and points are obviously higher than other loans on the list (see Figure 5.11). This cuts down the amount of arithmetic required. Eliminate loans that have the same rate as another loan on your list and more points. In the example that follows, American Home Mortgage Company's loan at 8 percent plus five points is priced higher than ABC Mortgage Company's loan at 8 percent plus 4.75 points, and First National Bank's loan is one point higher than Hometown S&L. Also eliminate loans that have a higher rate than another loan on your list and the same number or more points. First Federal S&L's

FIGURE 5.10 Sort Your List

Sort Your List

loan at 8.5 percent plus two points is higher priced than Hometown S&L's loan at 8.375 percent plus two points; so it, too, can be eliminated. First Home Savings Bank's loan at 8.25 percent plus 4.25 points is priced higher than ABC Mortgage Company's loan at 8.125 percent plus four points because both its rate and points are higher.

FIGURE 5.11 Begin Narrowing Your List

Begin Narrowing Your List

FIGURE 5.12 Select Reputable Lender with Lowest Effective Rate

Select Reputable Lender with Lowest Effective Rate

 
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