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The 10 Costly Errors of Loan Shopping

1. Avoid gimmicks.

Have you ever heard of "no closing costs" or " no origination fee?" Be forewarned, every lender must make money or they will go out of business! Is it possible to pay no closing costs or no origination fee? Yes, but there are many ways to skin a cat.

Every loan has closing costs...period. You may not pay them out of your pocket, but I guarantee you that you ARE paying for them. And the same thing goes for an origination fee. The costs may be labeled as something else, or they may simply be added on to the total amount you are borrowing. Now you're REALLY going to pay for closing costs, and pay finance charges on them for years to come.

2. Banks and credit unions are good, but have limited products.

There are literally hundreds of different loan products out there. Chances are, there is a product that is tailored just for your situation. Banks and credit unions are traditionally very limited on their products. Shop for a loan at a bank if you fit a very narrow, traditional profile of the perfect buyer.

A loan originator that works for a mortgage banker is often more experienced, more knowledgeable, and more capable of helping you find the loan that is right for you. A buyer should be involved in choosing the loan that is best for him or her...not the other way around.

3. Shopping for an interest rate

Don't do it! Well, at least not without looking at the big picture. Any lender can offer you a lower rate...but you will have to pay for it, just like everybody else. Since loan fees are not standardized, a lender can "discount" the interest rate, but you will likely pay for it as some fee on the settlement statements at closing.

There are sometimes legitimate"better deals" with interest rates. The only way to know is to get a full disclosure of all of the final fees you will be paying when you go to close on your home.

4. Ignoring the APR

APR, on annual percentage rate, is how much your loan costs you every year. The only reliable way to compare one loan to another is to compare the APR of each one. Whichever loan has the higher APR is more expensive.

The APR is calculated by adding in all the costs of the loan, then amortizing it over time. It is the quickest way to compare loans, but may not tell you everything you need to know.

5. Surprise, surprise...prepayment penalties!

Some loans come with penalties if you pay them off to quickly or if you sell your home within a certain amount of time. Now it starts getting complicated.

A loan with a low APR (better deal) may have a prepayment penalty attached to it. If you sell you home with two years, as an example, you could have a penalty that is nearly SIX TIMES your monthly payments. Obviously, this would not be the better loan if you might be moving or selling anytime soon.

6. Not getting the "Truth In Lending" statement.

The Truth in Lending Act (TILA),was passed by Congress in 1968. It provides a uniform manner of calculating and presenting the terms of consumer loans to enable you to compare costs so you can make informed choices about credit.

A good lender will always offer you a Truth in Lending Statement. It is normal for this to be delayed a few days while they shop for the best loan for you.

But be careful! If you have provided the lender with everything needed, yet the lender refuses to give you this statement...turn around, run, and don't look back! View the 5 criteria that must be disclosed to you in the Truth in Lending Statement.

7. Bait and switch

Unfortunately, some people still do this. You get told one thing, and you get another. See Loan Shopping Mistake #6.

8. Not asking for an experienced loan officer

Let's face it, loans are complicated enough without throwing an inexperienced newbie into the mix. Most loan officers never make it, and have to quit before they ever get any good at it.

Ask your loan officer some important questions before you get started. First, how many loans has he or she closed? Will the loan be processed here in Utah or will it be farmed out to the desk of a stranger in another state? Is the loan officer licensed in the state of Utah? Finally, ask if the lender has a PLM. If they can't tell you who their PLM is, run! (By the way, you can check out state licensing and PLM verification at the Utah Department of Commerce.)

9. Helping out a friend or family member that is new

Everybody seems to have a friend or relative that does loans part time or is new to the business. Many people make the mistake of entrusting their largest financial investment to the new guy. The assumption is often that "they will work harder" or "they will take care of me" or even, "they will give me a deal." All of these may be true, but when something goes wrong...see Loan Shopping Mistake #8.

10. Waiting to save more money before buying

Many first time buyers want to save money to put down on a house. Don't! Even in a slow real estate market, home prices can easily go up $300-$500 every month. In a hot market, prices can go up $1000 or more every month! Chances are you will not be saving money by waiting to buy.

Tony Fantis is a full-time professional Realtor, and is in the top 5% of all Utah Realtors. He works out of Salt Lake City with RE/MAX Associates, Utah's #1 office in sales per agent. Tony Fantis may be reached by dialing 1-800-827-7362 or 801-541-8806.