How to Compare Mortgage Options Like a Pro

Shopping for a mortgage can be difficult, since lenders present the numbers in so many different ways, and it's easy to focus on whichever number stands out first. Knowing what to actually compare is what helps you save money.

Know That the Interest Rate Isn't the Whole Story

The interest rate quoted by the lender is only one part of the equation for what you'll owe in interest. Ask the lender for the annual percentage rate (APR), which includes most closing costs, so you can compare the total cost of the loan. Sometimes a higher-rate loan with lower fees can actually be cheaper than a lower-rate loan with higher fees. Ask each lender why their APR is different before choosing based on the interest rate stated alone. The bigger the difference between the rate and APR, the more likely there are fees involved.

Compare the Terms of the Loans

The length of the term also has an impact on the amount you'll pay. A 30-year fixed-rate loan will have a lower monthly payment than a 15-year fixed-rate loan, but will have a much higher total amount of interest paid by the end of the loan. An adjustable-rate loan can have a fixed-rate period at the beginning of the loan term. You should ask about the difference between the fixed-rate period and the adjustable rate before choosing an adjustable-rate loan.

Know the Closing Costs

Two lenders with similar APRs can have vastly different fees once you add up the costs of the origination, appraisal, title, and any other costs associated with closing on the home. You should ask for a loan estimate from each lender. Federal law dictates that each lender give the same information in the same way so that you can compare them side by side. Some of the fees are often negotiable, and it's worth asking to lower them if a particular lender is unwilling to negotiate at all.

Factor In How Long You Plan on Staying

The length of time that you stay in the house is important in figuring out the best loan for your needs. If you know you'll be selling the home in a few years, you may want to consider an adjustable-rate mortgage with a lower starting rate rather than a fixed-rate loan, where you pay a higher rate for the whole time. If you want to reduce the rate you pay but aren't sure you'll stay in the home long enough to make it cost-effective, it may not make sense to pay points to buy down the rate. There's no right or wrong choice for how long you should have the loan; it depends on your needs and wants.

Always Get It in Writing

Verbal offers can be withdrawn at any time, so ask each lender to send you a copy of the loan estimate in writing and ask that they all be sent the same day since rates change every day. Always ask what will happen if you can't close the loan by the date indicated in the contract. Many people assume that a rate lock guarantees their rate won't change, but this isn't always true. A little extra homework upfront can save you thousands over the life of the loan.

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