6 simple steps to the best possible mortgage

Gold house on top of arrayed dollar bills

Finding the right home loan, with the lowest possible interest rate and reasonable fees, can save you thousands of dollars now and for years to come.

All you need is a plan that helps you ask the right questions, make smart decisions and navigate the often complicated and confusing application process.

Our 6 simple steps to buy the best home loan provides the road map you need.

Let’s get started.

Step 1. Decide what type of home loan makes sense for you.

Traditional 30-year, fixed-rate home loans are so affordable that they’re the right choice for most borrowers.

But the cost of adjustable-rate mortgages has plunged to record lows this year, making them a smart choice for some borrowers.

(Note that we’re talking about ARMs with reasonable and responsible terms, not the reckless, unaffordable types of adjustable-rate mortgages that contributed to the foreclosure crisis.)

If you know you’ll own your home for fewer than five to seven years, a traditional ARM might make sense. Our adjustable-rate mortgage calculator shows you how much you can save.

The interest rates on shorter term loans are also significantly lower than traditional 30-year, fixed-rate loans.

If you can afford higher monthly payments, a 15- or 20-year home loan will cut your total interest payments and retire your debt more quickly. Our 15 year vs. 30 year mortgage comparison calculator helps you see whether a shorter loan is right for you.

Step 2. Shop around for a competitive mortgage rate.

Once you decide on the type of loan, just get out there and see who's offering the lowest interest rates.

Look online. Our extensive database of mortgage rates allows you to compare loans being offered by dozens of lenders in your area.

Ask around. Talk to friends and family members, even a real estate agent, to see whether they'd recommend a lender based on their experience with it.

Consider credit unions. They often charge less than commercial banks. The trick is, you have to be a member of the credit union to get a loan, and membership is restricted to certain communities.

To find out if you're eligible to join a credit union, start by asking your employer. Also try family and friends or go to findacreditunion.com to locate ones you might be eligible to join.

If you have bad credit, a loan is hard to get. Your best -- and in many cases only -- option is to qualify for a federally backed loan program.

To learn more about that, go to our advice on how to get an FHA or VA loan.

Step 3. Pick the best deal and get preapproved.

For most borrowers, the best loan is the one with the lowest rate and fees of $2,000 or less.

Contact the lender and ask to be preapproved for the home loan you want.

You'll need to fill out an application with how much you make, how much you have in savings and how much you owe on everything from cars to school loans to credit cards.

The lender will evaluate that information, check your credit report and scores and, if you pass their tests, reply with a letter saying you've been preapproved and how much you can borrow.

That's your first chance to see how creditworthy a lender considers you to be and to discover any problems that might make it difficult to qualify for a home loan, borrow as the amount you want and get a good rate.

Preapproval can help you get the home you want, because it tells the sellers that you can obtain the loan you need to complete the purchase.

(Don't settle for being prequalified. That means the lender took your word for everything and didn't pull your credit history or scores. The lender could have a different answer, when you’re ready to buy and it performs its full evaluation of your financial status. )

Step 4. Apply for the loan.

Once you've found the home you want to buy, it's time to pull out the checkbook and apply for real.

Most lenders charge a nonrefundable application fee that can range from less than $250 to as much as $600.

Most borrowers stick with the bank or mortgage company that preapproved their loan.

But don't be surprised if you have to fill out a second application. (Here's a look at the questions you'll be asked and the information you'll need to complete the forms).

You'll also have to provide a copy of your purchase agreement and verify your income, savings and debts with bank statements, check stubs and many other documents. (Here's a checklist of the paperwork you'll need.)

Within three days of applying, lenders must provide what’s called a Good Faith Estimate.

This is the most important document you’ll receive during the entire process application process. It summarizes all of the key terms, from interest rates to closing costs.

Use our list of the 8 critical questions your GFE should answer to make sure the loan you’re getting is the loan you were promised.

Step 5. Lock in a rate.

Interest rates change daily and lenders won't guarantee the rate you get until 30 to 45 days before closing.

As that day approaches, you need to check around one last time to make sure your lender is still offering the best -- or close to the best -- deal.

More often than not, that will be the case. But if you're suddenly being quoted a significantly higher interest rate or one that's no longer competitive with what other lenders are advertising, you need to ask why.

If your loan officer doesn't have a good answer, you need to reapply somewhere else.

Although switching lenders could force you to push the closing back a few weeks, you shouldn't hesitate to pursue the best possible loan.

With home sales unsteady and the real estate market still in turmoil, no seller in their right mind is going to kill a deal over a delay like that.

Step 6. Get the commitment letter.

Your sales contract will set a deadline, usually a week to 10 days before closing, to obtain final approval for your loan.

Although your bank knows that date from the sales contract, you should remind everyone you speak with about the deadline, especially if the process seems to be dragging on.

If you miss the deadline, the seller can terminate the sale and try to keep your earnest money. (That's the cash you are usually required to give the seller's real estate agent when your offer is accepted.)

But, as we said, you can expect the seller to be patient in a market like this.

Once you have your contract, you're ready for closing.

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