Shopping for a mortgage involves more than a mortgage rate comparison -- you must analyze the loan's terms and its costs. You need to choose a program that's appropriate for your situation. To make things more complicated, mortgage rates and closing costs can change between the time you apply for a home loan or refinance and the day your mortgage closes. One tool that allows you to compare all kinds of loans and their terms is LendingTree's LoanExplorer. You simply input your loan amount, credit rating, property value and location, and you'll see real offers from competing lenders, based on your profile -- not pie-in-the-sky interest rates that almost no one can get.
Finding a Mortgage that Works for You
Choosing the wrong loan can be a costly mistake. To avoid this, know the answers to these three questions before shopping for a home loan or refinance mortgage:
- How long do I plan to keep the home I'm buying or refinancing? If you're buying a starter home and plan to move up in a few years, a hybrid adjustable rate mortgage can save you a lot of money. The 5/1 ARM, for example, carries an interest rate about one percent lower than a 30-year fixed loan, and that rate is fixed for five years. Planning to retire in a few years? Use a mortgage calculator to see how a 15-year mortgage term can help you pay off your mortgage faster and save on interest.
- Does the home I'm financing need work? If you've found a home that's a diamond in the rough, or your current home needs major work, FHA's 203(k) program might be perfect -- it rolls construction and renovation costs into a home loan that's approved based on the upgraded value of your home.
- What can a refinance mortgage do for me?: Most homeowners refinance to lower their mortgage rates and monthly payments, but it may be possible to take cash out for debt consolidation, home improvement projects or other needs. If you don't mind higher mortgage payments, but want a lower rate, refinancing from a 30-year mortgage to a 15-year mortgage can help you save on interest while paying off your mortgage faster.
How to Compare Mortgage Rates
When undertaking a mortgage rate comparison, you'll check your mortgage quotes for these features:
- Mortgage amount: This is the minimum amount you'll need to cover the home purchase price or to pay off your existing loan. It can change according to your down payment amount and whether closing costs are being rolled into your loan amount. A cash-out refinance provides enough to pay off your existing mortgage plus an additional amount that you've chosen.
- Loan Term: This is the maximum life span of your mortgage loan. Most mortgages are written for 30 years, but it's possible to take out mortgages with shorter terms. The shorter the repayment term, the more you can potentially save on interest paid over the loan term. Also, shorter-term mortgages offer lower interest rates. You can lower your current mortgage payments by refinancing to a lower rate over 30 years.
- Fixed or adjustable mortgage rate: Today's lower mortgage rates can make a fixed-rate mortgage a "no-brainer," but in certain situations a hybrid adjustable rate mortgage can be a great choice. Hybrid loans provide a lower fixed mortgage rate for a specified number of years. When the introductory fixed rate period expires, the hybrid mortgage converts to an adjustable rate mortgage and begins resetting at regular intervals. When comparing mortgages with adjustable rates, verify how, when, and by how much payments can adjust.
- Mortgage rate: Getting the lowest possible mortgage rate is the primary goal of mortgage shoppers -- however, lower rates cost more, and the extra isn't always worth paying. Comparing annual percentage rates (APRs) between lenders can be helpful -- unlike the interest rate, APR incorporates the cost of financing, allowing consumers to compare loans with different rates and costs.
- Discount points: One discount point is equal to one percent of your mortgage amount. If you're borrowing $150,000, one discount point would be $1,500. Discount points can vary, so it's important to compare discount points along with mortgage rates.
- Lender fees: Mortgage lenders charge fees for originating home loans. Some lenders may quote rock-bottom fees and have higher discount points, while others may have higher lender fees and no discount points.
- Closing costs: It's important to compare estimated closing costs with the knowledge that some closing costs can change. Closing costs include an attorney or closing agent's fee, title insurance or abstract of title fees, survey, home appraisal and inspection fees and document recording fees. Each closing is subject to individual circumstances, but in general, mortgage quotes should be similar for closing costs.
The Federal Trade Commission advises consumers to shop, compare and negotiate when looking for a mortgage. Check these items as you compare mortgage quotes to help you negotiate and select your next home purchase or refinance loan.