Shopping for a Loan

 

Your Choices

Your choice of lender and type of loan will influence not only your settlement costs, but also the monthly cost of your mortgage loan.  There are many types of lenders and types of loans you can choose. Lenders that may provide home mortagage loans include banks, savings associations, mortgage companies, and credit unions. Often the price of a home mortgage loan is stated in terms of an interest rate, points, and other fees. A "point" is a fee that equals one percent of the loan amount. Points are usually paid to the lender, mortgage broker, or both, at the settlement or upon the completion of the escrow.  Often you can pay fewer points in exchange for a higher interest rate or more points for a lower rate.  Ask your lender or mortgage broker about points and other fees. A document called the Truth in Lending Disclosure Statement will show you the "Annual Percentage Rate" (APR) and other payment information for the loan you have applied for.  The APR takes into account not only the interest rate, but also the points, mortgage broker fees, and certain other fees that you have to pay.  Ask for the APR before you apply to help you shop for the loan that is best for you.  Also ask if your loan will have a charge or a fee for paying all or part of the loan before payment is due (i.e., a "prepayment penalty"). You may be able to negotiate the terms of the prepayment penalty.

Mortgage Brokers

Some companies, known as "mortgage brokers" offer to find you a mortgage lender willing to make you a loan.  A mortgage broker may operate as an independent business and may not be operating as your "agent" or representative. Your mortgage broker may be paid by the lender, you as the borrower, or both.  You should ask about the fees that the mortgage broker will receive for its services.

Government Programs

You may be eligible for a loan insured through the Federal Housing Administration (FHA), or guaranteed by the Department of Veterans Affairs or similar programs operated by cities or states.  These programs usually require a smaller downpayment and/or have income restrictions.  Ask lenders about these programs.

Types of Loans

Loans can have a fixed interest rate or a variable interest rate.  Fixed rate loans have the same principal and interest payments over the loan term.  Variable rate loans can have any one of a number of "indexes" and "margins" which determine how and when the rate and payment amount change.  If you apply for a variable rate loan, also known as an adjustable rate mortgage (ARM), a disclosure and booklet required by the Truth in Lending Act will further describe the ARM.  Most loans can be repaid over a term of 30 years or less with equal monthly payments.  The amounts can change from time to time on an ARM depending on changes in the interest rate.  Some loans have short terms and a large final payment called a "balloon." You should shop for the type of home mortgage loan terms that best suit your needs.