Mortgage lending is mechanical, impersonal and competitive. So hunt for the best loan -- interest rate, points, processing costs and, on adjustable mortgages, the most favorable adjustment features. Don't pay much attention to who's originating the loan or where the lender is. And don't place too much value on your current bank or thrift relationship, either. 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.
To find out about lenders’ 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, you can use tools such as mortgagemarvel.com and freeratesearch.com.
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Just remember, you won’t know what interest rate and loan amount you’ll really qualify for until the lender knows your credit score and the amount of your current debt.
The basics
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. Paying a point up front will reduce your interest rate by about 0.25%. Compare mortgages by their annual percentage rates (APR), which include the cost of points and other fees.
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. (See Pros and Cons of Fixed-Rate Loans.)
Adjustable-rate mortgages (ARMs) generally start lower than their fixed-rate cousins but their interest rates can rise -- or fall -- during the term of the loan. (See All about ARMs.)
What's best for you?
Deciding which mortgage is best requires a close look at your present circumstances, future earnings and financial goals.
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 hovered near the historic low of 5% throughout most of 2009-2010). Look for the best rate you can get. Paying 5.0% rather than 5.5% on a $100,000, 30-year fixed-rate mortgage will save you $64 each month.
On the other hand, say you plan to put the home up for sale in three to five years. 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 (and the ability to pay off the mortgage without penalty) are more important than getting the absolute lowest available rate, because you'll have less time to defray those up-front costs. If you expect to refinance or pay off the ARM early, avoid loans with prepayment penalty or try to negotiate away the penalty before you agree to take the loan.
For most home buyers, the choices are these:
Will your down payment be small or large?
Do you want a long-term or shorter-term loan (15 or 30 years)?
Do you want a fixed-rate or adjustable-rate mortgage?
Will you pay points for the lowest-rate mortgage or will you shop for a loan with few or no points and therefore a higher rate?
