Comparing Mortgage Costs

Buying a home will likely be the biggest investment you’ve ever made, so it’s important to do your homework.

Be sure to get information about mortgages from several lenders or brokers. Know how much of a down payment you can afford, and find out all the costs involved in the loan.

Knowing just the amount of the monthly payment or the interest rate is not enough. Ask for information about the same loan amount, loan term, and type of loan so that you can
do an “apples to apples” comparison.

The following information is crucial to obtain from each lender and broker:

Rates

  • Ask each lender and broker for a list of its current mortgage interest rates and whether the rates being quoted are the lowest for that day or week
  • Ask whether the rate is fixed or adjustable. Keep in mind that when interest rates for adjustable-rate loans go up, generally so does the monthly payment
  • Fixed-rate loans generally have repayment terms of 15, 20, or 30 years. Both the interest rate and the monthly payments (for principal and interest) stay the same during the life of the loan
  • Adjustable-rate loans, also known as variable-rate loans, usually offer a lower initial interest rate than fixed-rate loans. The interest rate fluctuates over the life of the loan based on market conditions, but the loan agreement generally sets maximum and minimum rates. When interest rates rise, generally so do your loan payments. When interest rates fall, your monthly payments may be lowered.
  • If the rate quoted is for an adjustable-rate loan, ask how your rate and loan payment will vary, including whether your loan payment will be reduced when rates go down
  • Ask about the loan’s annual percentage rate (APR). The APR is the cost of credit expressed as a yearly rate. It includes the interest rate, points, broker fees and certain other credit charges that the borrower is required to pay

Points

  • Points are fees paid to the lender or broker for the loan and are often linked to the interest rate; usually the more points you pay, the lower the rate
  • Check your local newspaper for information about rates and points currently being offered
  • Ask for points to be quoted to you as a dollar amount – rather than just as the number of points – so you will actually know how much you will have to pay

Fees

  • A home loan often involves many fees, such as loan origination or underwriting fees, broker fees, and transaction, settlement, and closing costs
  • Every lender or broker should be able to give you an estimate of its fees. Many of these fees are negotiable. Some fees are paid when you apply for a loan (such as application and appraisal fees), and others are paid at closing
  • In some cases, you can borrow the money needed to pay these fees, but doing so will increase your loan amount and total costs. “No cost” loans are sometimes available, but they usually involve higher rates
  • Loan origination fees are fees charged by the lender for processing the loan and are often expressed as a percentage of the loan amount
  • Transaction, settlement, or closing costs may include application fees; title examination, abstract of title, title insurance, and property survey fees; fees for preparing deeds, mortgages, and settlement documents; attorneys’ fees; recording fees; and notary, appraisal, and credit report fees
  • Under the Real Estate Settlement Procedures Act, the borrower receives a good faith estimate of closing costs at the time of application or within three days of application. The good faith estimate lists each expected cost either as an amount or a range
  • Ask what each fee includes. Several items may be lumped into one fee
  • Ask for an explanation of any fee you do not understand. Some common fees associated with a home loan closing are listed on the Mortgage Shopping Worksheet

Now, let’s talk about your downpayment.