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Shopping more than mortgage rates: 5 things to consider

[Feb 11, 2010.]


The first thing to understand about advertised mortgage rates is that they are typically the lowest available rates, which means that only folks with excellent credit, high down payments, and steady employment histories may qualify. There are other factors affecting your bottom line on mortgage loans:

  • Mortgage loan type: The most common loan types are fixed-rate (FRM) and adjustable-rate (ARM) loans, but there are multiple varieties of ARM loans, and also exotic mortgages such as balloon mortgages, negative amortization loans, and others. Make sure you understand what type of mortgage loan you're being offered.

  • Mortgage repayment term: Taking out a 15- or 20-year mortgage can save thousands of dollars compared to a mortgage with a 30-year repayment term. Use mortgage calculators for comparing mortgage rates and features. Although a mortgage calculator's numbers are only general estimates, they are helpful for making comparisons and estimating monthly payments and affordability.

  • Paying points: Mortgage lenders usually charge "points" for more favorable mortgage rates. A point is 1 percent of your mortgage loan amount: one point on a $200,000 mortgage is $2,000. Points may be negotiable, and it's worthwhile to pay close attention to points charged in mortgage quotes. If you have credit problems, you can expect to pay higher points for lower mortgage rates.

  • Closing costs: Lender fees and costs, third-party charges such as appraisal fees, and title work all add up to closing costs you'll pay when taking out a mortgage or refinance loan. Estimated closing costs can vary widely between mortgage lenders, and estimated closing costs are usually different from actual closing costs. Good faith estimates, itemized on a HUD-1 form, show what you'll likely pay in closing costs for a particular mortgage. Some closing costs may be negotiable, and if you're buying a home, you can ask sellers to pay all or part of your closing costs.

  • Your credit: Mortgage lenders typically won't make mortgage loans if you've had a foreclosure within the past three years, or filed bankruptcy within the past two. Mortgage rates quoted will depend on your FICO credit scores; in today's strict credit environment, FICO scores of 750 and above are required for getting the best rates. If you're not in a hurry to buy or refinance your home, taking time to increase credit scores can be worthwhile. Order free copies of your credit report and purchase your credit scores before contacting mortgage lenders; finding and correcting errors can help raise your credit scores.

Current low mortgage rates are offering buyers and homeowners great opportunities for finding affordable mortgage loans, but paying attention to the "big picture" can lead to more productive mortgage shopping.


About Author:

Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.

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