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.
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To find out about current offerings, you can call lenders directly or go through an online mortgage-shopping service, such as those offered by Zillow.com and LendingTree.com. In those cases, loan officers and mortgage brokers will call you. If you prefer to shop anonymously, try mortgagemarvel.com.
Just remember, you won’t know what interest rate and loan amount you’ll really qualify for until the lender pulls your credit score and knows the amount of your current income and debt, and home equity if you currently own a home.
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.
Lenders market a wide variety of mortgages, but when you get down to it there are only two varieties:
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?
If you plan to stay in your house for years to come or indefinitely, then locking in a fixed rate, especially when it’s relatively low, makes sense (the 30-year fixed rate hit a the historic low of 3.35% in late 2012 and hovered between 4.0% and 4.4% throughout most of 2014, according to Freddie Mac). Look for the best rate you can get. Paying 4.0% rather than 4.5% on a $200,000, 30-year fixed-rate mortgage will save you $59 each month.
On the other hand, say you plan to put the home up for sale in three to five years. You’d be smart to choose a hybrid ARM with an initial fixed-rate period (typically three, five or seven years) that matches how long you plan to stay. In this case points and closing costs are more important than getting the absolute lowest available rate, because you’ll have less time to recoup those up-front costs with the lower payments and home-price appreciation. If you expect to refinance or pay off the ARM early, avoid a loan with a prepayment penalty, or try to negotiate away the penalty before you agree to take the loan.
- Will your down payment be small or large?
Most lenders require a minimum of 3% to 5% down. If you put down at least 20%, you won’t be required to pay an additional monthly premium for private mortgage insurance (PMI), which protects the lender if you default. The more you put down, the better the interest rate a lender will offer you.
- Do you want a term of 15 or 30 years?
On a $200,000 loan with an interest rate of 4.0%, the difference in monthly payment between a 15- and a 30-year term would be $525. But15-year loans typically carry a slightly lower rate and reduce the interest you pay over the life of the loan. Borrowers who can afford the higher payment might choose the 15-year term in order to pay off the loan before their children head off to college or before they retire.