Getting a mortgage: Finding the best loan

House on mortgage

Once you've found the perfect home, you need the perfect loan to pay for it. You already know what you want: the lowest interest rate and smallest monthly payment possible. And you want to get it from a lender who is easy to work with and who will not hit you with any last-minute surprises or hidden fees.

Here's a simple, step-by-step plan to find and get the best possible mortgage.

Step 1. Decide what type of loan is right for you.

Before you even start looking for a lender, you have to know what type of loan you are looking for. There are two basic types: fixed-rate and adjustable-rate mortgages, known as ARMs.

With a fixed-rate loan, the basic monthly payment interest and principal, not counting taxes, insurance or any assessments stays the same for as long as you have the loan.With an ARM, the interest rate can change. When and how it changes will depend upon the type and length of the ARM you have. There are one-year ARMs, where the interest rate stays the same for the first year, and then changes based on what the interest rate is on the date it changes. There are three-year ARMs, and so on.

The charm of an ARM is that the initial interest rate is usually lower than a 30-year loan.

In general terms, the main factors you should think about when looking at a mortgage is how long you can reasonably expect to stay in a house. If you know you will be transferred in two years, then a two-or three-year ARM makes sense, since you'll be buying a new home at whatever the interest rate will be at that point, no matter what interest rate you pay now. If you plan on being there for the long haul, a fixed rate loan is your best deal.

There are a couple of mortgages that deserve special attention because they can be very dangerous... which, in mortgage terms, means expensive. You should learn more, and think hard, before taking out an:

Option ARM. Buying a loan with four different payment options seems like a great idea. But if you make the "minimum payment" every month which many borrowers do you'll actually be adding to your debt, not paying it down.

Forty- or 50-year loan. By spreading the loan over four or five decades you'll pay tens of thousands of dollars in additional interest, build equity very slowly, and lower your monthly payments surprisingly little.

Interest-only loan. These also appear "cheaper" because all you are paying is the interest. The interest, in many cases, however, can fluctuate from month-to-month. And regardless of what it does, you are not reducing the principal unless you have the discipline and income to make extra payments.

Jumbo loan. Before borrowing $417,000 or more you should ask yourself if you can really afford to pay $3,000 or more, month after month, for a house? If you got ill or lost your job, do you have enough money saved to keep up with the payments? Did we mention that you'll pay a higher interest rate for a jumbo loan, too?

Finally decide if you can qualify for a lower interest rate by qualifying for a program in which the government guarantees to repay the loan if your default on your payments. To find out if the three most popular programs can help you, go to: 

Step 2. Find lenders offering the best deals.

Go to our database and compare the rates being offered by scores of lenders in your area. Click on "Rate" under the heading "Current Quote" to automatically order all the rates from cheapest to most expensive.

The estimated monthly payment, for principal and interest, is for the smallest loan in the range that you chose. So if you checked the $300,001 to $417,000 range, the payment shown would be for $300,001 loan.

Then look at the fees and discount points the money the lender charges you for making the loan. (These, however, do not include the closing costs. That is completely separate.)

You'll see a huge difference. A range from $49 to $7,000 or $8,000 is not uncommon. And the best interest rates almost always come with the biggest fees.

Here's how to figure out the best deal.

Let's say you plan to live in a home for two years. What will your total basic mortgage payment interest plus principal be for two years? Now add in the fees and any discount points and divide that number by 24 to figure out what the total cost of the mortgage would be spread out on a monthly basis. Do this with a number of different lenders.If you can reasonably expect to be in the home for five years, do the same thing for five years, and so on.

Often you'll find the best deals offer rates that are about half-a-percentage point higher than the lowest rate and charge between $1,000 and $2,000 in fees.

Step 3. Create a list of finalists.

Create a list of finalists by picking two or three lenders that offer the best deals.

If you've been preapproved for a loan and that's one of the first things you should do before you even begin looking for a house that lender is a top candidate for this list, too.

Also talk to friends and family members, even a real estate agent, to see if they had such a great experience with a bank or mortgage company they'd recommend it to you.

You should also tell friends and family which companies you're considering. Even one bad experience is enough to scratch a lender off your list.

Step 4. Contact those finalists for a personal quote.

Call or e-mail at least three of those lenders for a quote interest rate, fees, and discount points that takes into account the house you want to buy, your down payment, credit history and debts.

Be honest in what you tell them. You want as much assurance as you can get that you'll qualify for the deal you're expecting.

There is nothing wrong with seeking quotes from four or five. It's your choice. You determine how much time you want to spend looking for the best loan possible -- a loan you will probably be living with for years to come.

Step 5. Consider how you and others feel about them.

When choosing a house, the mantra is "Location. Location. Location." In lending, it's "Reputation. Reputation. Reputation."

After you've seen the numbers, evaluate the loan officers you're speaking with and the companies they work for.

Does dealing with a national company over the phone or Internet bother you? Are your e-mails and phone calls promptly and courteously returned? Or would you feel better meeting face-to-face with a loan officer working out of a local bank or mortgage company office?

Are you comfortable talking to them about your finances, even the messy parts like the very black marks and minor smudges on your credit history?

Do you get specific answers to questions?

The more vague the response, the more nervous you should become.

Google the lenders you're considering to find news stories, consumer groups or blogs that discuss their service and business practices. Check with the Better Business Bureau, too.

Ask for references.

all those previous customers. Ask if they're satisfied with both the deal and the way they were treated. Were there were any last minute surprises, demands or delays? Would they borrow from that lender again?

Step 6. Choose your lender and apply.

Pick the lender that offers the best combination of price and service and apply for a loan.

This is where you'll have to start pulling out the check book. Most lenders charge a non-refundable application fee that can range from less than $250 to as much as $500.

Even if you choose the bank or mortgage company that preapproved you, there will be another application.You'll also be asked for a copy of your purchase agreement and to document your income, savings and debts with bank statements, check stubs and many other documents.

The lender will also want to see proof that you have homeowners insurance effective the day you close on the house. So you'll need to buy a policy and send a copy to your loan office. For more on all of the insurance decisions you'll face.

Step 7. Lock in a rate.

Interest rates fluctuate and most lenders won't guarantee what you'll pay until 30 or 45 days before closing. So sometime between when you apply and get final approval you can lock-in to the rate being offered at that time.

If interest rates go up before your purchase closes, you're protected. You get the earlier, lower rate. A few mortgage companies charge to lock you in, imposing either a flat fee or a fraction of a percent point to the interest rate. A 15-day lock will be cheaper than a 30-day lock, and a lock on a $100,000 loan will cost less than one on a $250,000 loan.

Some lenders will offer a one-way lock or float-down. You are protected if the rate goes up, but if the rate goes down, you get the lower rate. With most lenders you've got to pay the higher rate you locked into.

Step 8. Getting the commitment letter.

Your sales contract will set a deadline, usually about a week to 10 days before closing, for winning final approval for your loan. If you don't have it, the seller can terminate the sale and try to keep your earnest money. (That's the cash you may be required to give the seller's real estate agent when your offer is accepted. The seller gets to keep it as compensation for taking his or her home off the market if you can't close the deal.)

Although your bank should know that date from the sales contract, you should remind everyone you speak with about the deadline, especially if it's near and the process seems to be dragging out.

Once you have it, you'll need to give a copy to your real estate agent, who will pass it along to the seller.

You're ready for closing.

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