If you’re in the market for a mortgage, you’ll want to hunt for the best loan — interest rate, points, closing (processing) costs and, on adjustable mortgages, the most favorable adjustment features. However, don’t pay much attention to who’s originating the loan or where the lender is. Odds are your loan will be sold once or twice over its term and you’ll end up making your payments to a different lender or loan servicer.
There are two basic ways mortgage lenders charge you for using their money: through the interest charges you pay each month over the life of the loan, and through discount points, which is prepaid interest on the loan (one point equals 1% of the loan amount). You can reduce your interest rate by about an eighth to a fourth of a percentage point by paying a point up front when you close on the loan. To make an apples-to-apples comparison of the rates you’re offered, ask lenders to quote you rates with 0 points.
Fixed-rate mortgages lock in your interest rate for the life of the loan. Your total monthly payment of principal and interest remains constant, but the portion of each payment allocated to principal grows as you pay down the loan balance.
Adjustable-rate mortgages (ARMs) generally start lower than their fixed-rate cousins but the rate can rise — or fall — during the term of the loan.
What’s Best for You?
Deciding which mortgage is best requires a close look at your current circumstances, future earnings and financial goals.
For most home buyers, the choices are these:
- Do you want a fixed-rate or adjustable-rate mortgage?
- Will your down payment be small or large?
- Do you want a term of 15 or 30 years?