How to Compare Two Mortgages

Comparison shopping is the best way to save money, and when buying a home, comparison shopping for the mortgage is as important as shopping for the house. Mortgages have lots of components to them, so it’s not as simple as considering a single price tag, like an interest rate. You need to look at all of the costs that make up each mortgage before comparing two mortgages.

While it’s not the only thing you should look at, the interest rate of a mortgage is a very important number, nonetheless. Interest rates change continually, so when comparing two mortgages with different interest rates, make sure you’re looking at the same point in time. Even a day can make a difference, so find out how long the rate will be locked in for once you submit an application for the mortgage.

Also, ask whether the interest rate is fixed or adjustable. A fixed rate will remain the same over the life of the loan, while an adjustable rate can rise or fall.

Research the length of the loan. Mortgage loans typically come in 15- and 30-year terms, but there are other lengths of loans available. When comparing two mortgages, it is best to compare loans of equal lengths. The length of your loan will affect both the interest rate you pay and how quickly you build equity in the property.

Consider the points, which are fees charged by the lender that represent interest paid in advance. One point equals 1 percent of the mortgage loan amount. Points are usually used to lower, or buy down, the interest rate of the loan.

Generally speaking, the more points you pay, the lower your interest rate will be, but your upfront costs may be greater. For this reason, many cash-strapped borrowers opt for a loan with no points.

Contrast the closing cost or fees. Mortgages come with a number of different fees, and not all loans will necessarily come with the same costs, so ask for a list. On it you may find fees for things such as a property appraisal, title search, notary charge or home inspection.

Many times, a loan origination fee is charged, which covers the lender’s administrative costs associated with the loan. This fee will be a percentage of the mortgage rather than a flat dollar amount.

Look at the down payment requirement. This is usually expressed as a percentage of the loan amount. A common down payment percentage is 20 percent, and this will generally allow you to escape a private mortgage insurance requirement. You will find down-payment requirements in a variety of percentages, however.

When you submit an application for a mortgage, the lender has three days to provide you with a good-faith estimate of the costs associated with the loan. You should find a good real-estate lawyer to assist you when buying a home. The lawyer can answer any questions you might have concerning the mortgage-comparison process.