When shopping for a mortgage, in addition to selecting a loan term, you're also likely to find different interest rates and closing costs from different lenders. Small differences can translate to thousands of dollars, so it's important to comparison-shop and determine which loan is best for you with a calculator like this one.
Differences between mortgages
When you're shopping for a mortgage, these are the main differences you'll find between your choices:
Interest rate. The biggest factor in determining your interest rate is the prevailing market rate, but there are other factors. Your credit score, for example, can impact your loan's rate. So can your loan term, as I'll discuss next. You can also choose to pay "discount points" to get a lower rate. And there can be small variations between interest rates among lenders for the exact same borrower.
Mortgage term. This refers to the length of time it will take to pay back the loan in full. 30-year mortgages are by far the most common, but 15-year mortgages are also offered by most lenders. While these are the two main term lengths, it's possible to have 10-, 20-, 25-, or even 40-year mortgages. In general, the shorter the term, the lower the interest rate, with all other factors equal.
Fixed- or adjustable-rate. Fixed-rate mortgages have the same interest rate throughout the term of the loan, while adjustable rates typically start out with a low rate for a set period of time (say, five years), and then periodically increase or decrease with the market rates for the remainder of the term.
Closing costs. These are the out-of-pocket fees you pay to obtain the loan. Lender fees, origination fees, and processing fees are examples of these. They can vary greatly between lenders and locations. For example, deed recording fees charged by the county or local government can fluctuate significantly by location.
When you incorporate all of the details of your mortgage into your comparison shopping, you can evaluate the loan's annual percentage rate, or APR, which is the most accurate picture of the true cost of the mortgage.
Why it's so important to compare your options
A common mistake among first-time homebuyers (and repeat buyers, too) is applying for just one mortgage and accepting whatever interest rate and other costs the lender offers. Interest rates and fees tend to vary between lenders, and even though the differences might not sound significant, you might be surprised at how big of a difference they make.
For example, let's say you're shopping for a $200,000 30-year mortgage, and you're offered two loan options. Both have the same closing costs, but the first comes with a 4% interest rate, while the second has a slightly lower 3.9% rate. This may not sound like much of a difference, but over the life of the 30-year loan, the cheaper option translates to $4,320 less in interest. This is a simplified example, but it illustrates why it's so important to compare your options.
Comparing your loan options
With that in mind, once you've gotten a few loan quotes, here's a calculator that can help you compare your options. You'll need to know your lender's origination fee, underwriting and processing fees, the cost of title insurance, and any other upfront costs.
As a final thought, many people believe that applying for several different mortgage loans will cause their credit score to go down.
While it's true that inquiries can affect your score, there's a special provision for "rate shopping." Specifically, if all of your mortgage or auto loan inquiries happen within a normal shopping period -- 14 or 45 days, depending on the version of the FICO formula -- it will count as a single inquiry. In other words, it doesn't matter if you apply for one loan or 20; the effect on your credit score will be exactly the same.
The point is that by shopping around for a mortgage, you have nothing to lose -- and potentially thousands of dollars to gain.
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