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How to Find the Best Fixed-Rate Mortgage

By Jeff

Understanding the fixed-rate mortgage lingo

When shopping for a fixed-rate mortgage, comparing prices is the key to finding the best home loan. Unfortunately, mortgage lenders have a variety of fees that are added to a home loan that are designed to increase their profits. The best way to ensure that you get the most cost-effective home loan is to know what fees you may encounter during the mortgage loan process.

Points and interest are the two biggest factors

Most people understand interest rates. The interest rate on a loan is the amount of money a lender is going to charge you for borrowing their money. Another key area in mortgages is points. Points are the fees that a lender charges you up-front for processing your loan. Many potential homeowners don’t have the money to pay for points when trying to secure their first home loan. The problem is that if no points are paid, a lender will have to make his money back somehow. That usually means a higher interest rate for the borrower.

Points and interest work against each other

On a home loan, points and interest work against each other. If a home loan offers higher points, or up-front fees, it will almost always come with a lower interest rate. Conversely, a loan that offers no points will have a higher interest rate. Homeowners often fail to realize that points can play a big role in determining which loan is the most cost-effective. If Loan A offers a 6 percent 30-year fixed loan with no points and Loan B offers a 5.75 loan with 1 point, which is best? On the surface, it would seem that the 5.75 rate loan is the best option. That depends, however, on how long you are planning on keeping the loan. Paying back the 1 point (or 1 percent interest) will wipe out some of the interest saved on the life of the loan. If you are planning on keeping that loan for a long time, then the lower interest rate with the 1 point is the best option. If you are planning on refinancing or selling your home in the near future, though, the home loan with no points will be best.

Ask the right questions when shopping for a fixed-rate mortgage

Because of the variables involving points and interest rates with mortgages, be sure to ask potential mortgage lenders to provide you with the same information. Don’t simply request interest rates, but ask that a lender provide you with an interest rate with a set amount of points. That way you can get a concrete estimate that can accurately be compared from lender to lender.

No-point loans should be approached with caution

Have you ever heard the adage “You don’t get something for nothing?” Keep that in mind when shopping for a home loan. Many lenders advertise no-points loans. If a loan offers no points, it is going to have a higher interest rate than one that requires a small up-front fee. Approach no-points loans with caution and be sure to compare them with other lenders. A no-points loan means that the lender has to make his money somehow.

Make sure you know about other mortgage fees

In addition to points and interest, there are other important areas where lenders make money on a mortgage. Arming yourself with knowledge about these fees will help you get the best home loan. Here is a look at some of the more common mortgage fees:

• An appraisal is always part of the mortgage process. A lender isn’t going to loan money on a home without determining its current market value. Paying for a certified appraiser will add anywhere from $200-$500 to your mortgage process.
• You can’t get a loan without filling out an application. Lenders charge application and processing fees to cover the cost of filing your paperwork and determining whether you are worthy of a loan. These fees also cover the lender in the event that you do not qualify for a loan.
• Lenders have to run a credit report before they can process your loan. This is usually a small fee (less than $100), but it still needs to be factored into the loan process. A credit report will alert the lender to any hiccups you may have in your credit history.

Beware of balloon loans

Balloon loans are ones in which a large part of the balance is due at one time. These loans can look like a fixed-rate mortgage on the surface, but can be damaging if a borrower doesn’t have sufficient money to pay off the remaining balance when it is due.

Shopping is the key to finding the right fixed-rate mortgage

Shopping home lenders is the key to finding the best fixed-rate mortgage. Make sure to get written estimates with detailed information about points, interest rates and all associated fees. The only way to make an informed decision is to ask each lender the same questions.

6/18/2008

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