Shopping overview -> Comparing loan offers

Comparing loan offers

The most important step in comparing different loan offers is to use the loan comparison worksheet to ensure that you have all the information needed.

Loans are complex with a variety of terms, conditions, and pricing options. When you have reviewed all of your loan options and understand loan pricing, and are clear exactly what product best fits your loan strategy, then you are ready to compare loan offers.

The Loan Comparison worksheet in the Shopping Toolkit is a tool designed to help you compare the variables that create the real cost of a particular loan. You need to know not only the interest rate, but also all the charges and/or credits that you will pay or receive.

One of the most important factors in the price of the loan is the ‘charge or credit for the rate’, explained in Loan pricing, points, and credits. In the past this was called ‘points’, and many lenders still refer to this charge as points. On the loan comparison worksheet and in the loan comparison calculator I use the language from the Good Faith Estimate (GFE), either ‘charge for this specific rate’ or ‘credit for this specific rate’.

Comparing fixed rate loans:

Comparing fixed rate loans is straightforward. For fixed rate loans that all have roughly the same cost, or credit, the best loan is the one with the lowest interest rate. If you get loans which have different rates and fees, you can use the loan comparison calculator to compare them.

Comparing ARMs:

If you are looking at ARMS I would encourage you to ask for quotes that have ‘no points’ or, in the language of the GFE, no charge for the particular rate. Because for most borrowers the expectation is that they will keep the ARM for no longer than the initial fixed period paying points or charges for a lower rate on an ARM usually doesn’t make sense – by the time they make up the cost of the points or charge for the rate in the form of the lower payment, the loan is paid off.


One last point about comparing ARM quotes:

There are other terms for the ARM which are important: the margin, the index, the adjustment caps and the life cap, all covered in the section on ARMs, and listed on the Loan comparison worksheet. When comparing ARMs:

  • a lower margin is better
  • a less volatile index is better – a loan indexed to US treasuries is better than one indexed to the LIBOR
  • lower initial adjustment caps are better
  • a lower margin is better
  • a lower life cap is better

However, remember that all of these are important only if you keep the loan after its fixed period ends.