Best Fixed Rate Mortgage

UMPC News

You've decided that you want a fixed-rate mortgage. The good news is that shopping for a fixed-rate loan is easier than shopping for an adjustable. Fixed rate loans don't come with all the bells and whistles that adjustables do.

The following are the primary ways in which fixed-rate mortgages may differ.

Interest Rate
The interest rate is the rate of interest that a lender charges you for borrowing their money. Unlike credit card interest rates, which are usually double-digit rates, fixed-rate loans are much lower. As of this writing, fixed-rate loans can be found for around 6.5 percent.

An interest rate quote on its own is completely meaningless. The interest rate on a fixed-rate loan must always be quoted with the points on the loan. If one lender offers 30-year mortgages at 6.25 percent and another lender offers them at 7 percent, the 7-percent loan is not necessarily worse. You need to know how many points each lender charges.

Points
Points are fees paid up front to your lender when you close on your loan. Points are actually percentages: One point is equal to 1 percent of the loan amount. So when a lender tells you that there are 1.5 points on a quoted loan, you pay 1.5percent of the amount you borrow as points. On a $100,000 loan, for example, 1.5 points costs you $1500.

If you are willing or want to pay more points on a given loan, the lender should reduce the interest rate. If you want to pay fewer points, your interest rate increases. You may want to take a higher interest rate on your mortgage if you don't have enough cash to pay a lot of points, which are paid up front when you close the loan. On the other hand, you might want to pay more points because the interest rate on your loan determines your payments over a long, long time – 15 to 30 years.

Suppose lender X quotes you 6.25 percent on a 30-year fixed-rate loan and charges one point (1 percent). Lender Y, who quotes 6.5percent, doesn't charge any points. Which is better? The answer depends mostly on how long you plan to keep the loan.

The 6.25-percent loan is .25 percent less than the 6.5-percent loan. Every year of the loan, it saves you .25 percent. But because you have to pay 1 percent (one point) up front on the 6.25-percent loan, it will take you about four years to earn back the savings to cover the cost of that point. So if you expect to keep the loan less than 4 years, go with the 6.5 percent option.

To compare the specifics of your loan offers, use our loan compare calculator.

Consider a no point loan if you can't afford more out-of-pocket expenditures now or if you think that you'll only keep the loan a few years. Make sure to shop around and compare different lenders' no-point loans when you decide that you want one.

Other Lender fees
In addition to points and the ongoing interest rate, lenders tack on all sorts of other up-front charges in processing your loan.

When two lenders are in a dead heat with regards to interest rate and points, these other fees can help break the tie. Besides, you need to know the total of all lender fees so that you can determine how much closing on your loan should cost you. Get an itemization of charges in writing from all lenders you are seriously considering.

Here are some of the main fees charged by lenders:

Application and processing fees
Most lenders charge a couple hundred dollars to complete your paperwork and process it through their underwriting(loan evaluation) department. The justification for this fee is that if your loan is rejected or if you decide not to take it, the lender needs to cover the costs. Some lenders return this fee to you upon closing when you go through with the loan.
Credit Report
Many lenders charge a fee for the cost of obtaining a copy of your credit report. This report tells the lender whether you've been naughty or nice to other lenders in the past. If you have problems on your credit report, get them cleaned up before you apply for a mortgage.
Appraisal
The property for which you are borrowing money needs to be valued. If you default on the mortgage, a lender doesn't want to get stuck with a property worth less than you owe. The cost is typically several hundred dollars for most residential properties.
No point, no-fee loans
Some lenders offer loans without points or other lender charges. Remember: Lenders aren't charities. If they don't charge points or other fees, they have to make up the difference by charging a higher interest rate on your loan. Only consider such loans when you lack the cash to close a loan or when you're planning to hold onto the loan for just a few years.

You pay many of these other fees when you apply for your mortgage. To minimize your chances of throwing money away on a loan for which you might not qualify, ask the lender whether you might not be approved for some reason. Be sure to disclose any problems on your credit report or problems with the qualities on which they don't like taking risks. Lenders don't take the time to ask about these sorts of things in their haste to get you to complete their loan applications.