The lowest rate is not always the best loan

House on mortgage

A loan with the lowest interest rate isn't always the best buy. Thousands of dollars in fees can turn a mortgage with a great rate into a lackluster deal.

Every lender charges something for processing your loan, getting an appraisal on the house you want to buy, origination or discount points and other fees.

A quick look at the mortgage rates in our database shows an astounding difference in fees. Some loans cost as much as $7,000 or more. Others charge as little as $300 or $400.

Most borrowers should avoid high-fee loans because the typical homeowner sells or refinances every seven to 10 years. That just isn't long enough to recoup the cost of a big fee, even if it came with a slightly lower interest rate.

Here's an example from our comparison charts. One lender is offering a $165,000, 30-year fixed-rate loan at 5.75% with $5,036 in fees. The monthly payment will be $963 for principal and interest. Another lender is offering 5.875% with $577 in fees. The payment on this loan is $976 or $13 more.

But it would take you 343 months at $13 a month -- almost the full length of the 30-year loan -- to recoup the $4,073 difference in fees. If you kept the house or loan for only seven years, you would pay the equivalent of $719 a year in fees versus $82 per year for the person who paid a total of $577.

An easy way to compare loans -- including their fees -- is to look at the annual percentage rate, or APR, which represents the true cost of the loan including all the fees.

It works something like this: Let's say you're borrowing $98,000 at 5.5% with $2,000 in fees. If you fold the fees into the loan, the amount you're borrowing rises to $100,000.

At 5.5% the monthly payment on $100,000 would be about $568. But if you were to make a $568 payment on a $98,000 loan (which is the amount of money you'll actually be receiving) the lender would have to charge you 5.68%.

That's the APR, and it's a better reflection of the actual cost of obtaining the loan. Although there are other formulas used on APRs that differ from the above, they generally reflect APRs on short-term adjustable-rate mortgages or other special programs.

You can find the APR for loans on our comparison charts. To rank loans from the least to most expensive, just click where it says "APR" on the charts.

You should also request the APR from each lender who provides you with a bid. Be sure and ask if they are including all fees in their calculation.

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