Before buying a house, you should shop around to get the best possible mortgage terms. While the interest rate is undoubtedly important, you need to look at the whole picture before choosing a lender.
Consider All the Terms
When you take out a mortgage, you will have to pay closing costs, which include an origination fee, title fee, and other charges. Sometimes a lender offers a low interest rate to entice customers but charges higher closing costs.Â
A lender might advertise a low interest rate that assumes that the borrower will purchase discount points. If you buy points, you will pay 1% of the loan amount at closing in exchange for a reduction in the interest rate. When comparing mortgage terms, find out if an offer includes points and, if so, how much more you will have to pay at closing to get a lower interest rate.
An adjustable-rate mortgage has a low introductory rate. After the initial term, the rate resets at fixed intervals and may go up or down. An ARM might have an attractive introductory interest rate, but make sure you know how long that rate will last, how often the rate will reset, and how high it can go.
The loan term is another key factor. A 30-year mortgage generally has a higher interest rate than a 15-year loan. If you take out a mortgage with a shorter term, you will have a lower interest rate, but you will have higher monthly payments that may or may not fit your budget.Â
Choose the Best Mortgage for You
When comparing loan estimates, look at the annual percentage rate (APR), which includes the interest rate and fees. You should also consider your personal situation and plans.Â
Think about how long you expect to live in the house. If a lender offers you a lower interest rate than a competitor, but the lower rate comes with higher closing costs, calculate how much you will save each month by going with the lender that offers the lower rate. Then divide the extra closing costs by that number to figure out how many months it will take to break even. If you won’t live in the house that long, you won’t save money by choosing the mortgage with the lower interest rate. You will be better off taking the loan with the higher interest rate and lower closing costs.
If you’re comparing an adjustable-rate mortgage to one with a fixed rate, find out how long the ARM’s low rate will last. If you expect to move before the rate resets, you won’t have to worry about it rising. That offer may or may not be better than a fixed-rate mortgage, depending on the closing costs associated with each.
Consider All the Factors
If you get multiple mortgage offers, their terms might differ in several key areas. Make sure that you understand exactly what each offer entails so you can figure out which best fits your current situation and future plans.
