You’ve seen the advertisements, get the calls from mortgage lenders, and hear friends and neighbors boast about their low mortgage rates. But how do you go about getting the best mortgage interest rate for yourself?

The best interest rate isn’t necessarily just the lowest rate — it’s the lowest rate you can get on the loan that fits your needs. You may see a five percent rate on a 15-year adjustable rate mortgage (ARM), but the payment amount for a short-term loan, not to mention the risk involved in an ARM, might not be right for you. A 30-year, fixed interest rate loan might be best for you, even though it will come with a slightly higher interest rate. More on Choosing a Mortgage Loan.

Once you know where you stand, do some research. Look at the interest rates on the type and term of loan that’s best for you. While researching, look at recent rate trends to get an idea of the direction in which interest rates are moving. Also, since key economic indicators also affect interest rates, start paying attention to the financial news.

Once you know your mortgage priorities and have an idea of where interest rates are (and where they’re heading), you can start calling lenders and brokers. Talk to several to find out their current mortgage interest rates, and see if points are included. Also find out how long their rate offers are valid. One lender may be offering a rate with a seven-day lock, while another may allow you to lock in the rate for 30 days. Once you reach a rate for the type of loan you want, lock in that rate. A lock is a promise to hold the rate made by the lender for a certain period of time. This way, should the rate go up, you will still get the rate you were quoted. Should You Pay Points on Mortgage Loans?

Consult the larger online lending sites to get an idea of what rates are like. LendingTree, E-Loan, and LowerMyBills.com are all good places to start.

As you compare the various quotes you have solicited, be sure you’re comparing apples to apples. Comparing interest rates on 15-year ARMs with rates for 30-year fixed mortgages isn’t helpful.

A word of caution: When you are loan shopping, not all lenders you talk to will be quoting you a real rate. Some lenders will simply tell you anything to get you to fill out an application and start up a dialogue. Likewise, some advertisements on television or in newspapers have strings attached, in the fine print. As always, if something sounds too good to be true, it probably is.

When you do sit down with a lender, pay attention to the features of each type of loan, including points, interest rate, and other provisions. Once you reach a rate for the type of loan you want, lock it in.

An FHA Loan is a mortgage loan insured by the Federal Housing Administration (FHA). The FHA does not provide the loan; rather, it insures the loan for the lender. If the borrower defaults, the lender can seek recourse from the FHA. This lowers the lender’s risk and makes them more likely to issue a loan.

The FHA was formed in 1934, and joined the Department of Housing and Urban Development in 1965. The organization has insured more than 33 million home mortgages since its inception. Today it continues to help low- and middle-income families move into their dream homes, by making it easier to obtain mortgages. More than 800,000 current homeowners have mortgages insured by the FHA.

One of the benefits of an FHA-insured loan is low mortgage rates. For single-family homes, down payments can be as low as 3 percent, making it possible to afford a higher-priced home than with a more conventional 10 or 15 percent mortgage. The FHA can also help home buyers finance their closing costs, and even offers mortgage insurance.

In addition, the FHA does not allow lenders to charge more than one percent for origination fees (what lenders charge for putting together loan documentation), and has no prepayment penalties, meaning that if you pay off the loan ahead of schedule, you won’t be penalized. As with other mortgages, the lender may ask you to pay points, which generally equals one percent of the total cost of the home.

As is customary with most loans, you’ll need to qualify for an FHA loan by meeting specific requirements, including:
* A good credit record;
* Enough money for a down payment, which can be as low as 3 percent;
* Total housing costs that are no more than 29 percent of your gross monthly income. Therefore, if your annual household income is $60,000, your housing costs, including principal, interest, property tax, and insurance, should not exceed $17,400, or $1,450 per month.

To obtain an FHA-insured loan, you need to find FHA-approved lenders and compare their loan offerings. Inquire about the income qualifications, which will vary by area. Also keep in mind that the maximum amount you can receive from FHA-insured mortgages varies from county to county, and from state to state. These mortgages are also subject to periodic improved adjustment, and that may be offered only in areas where residential real estate prices are high.

Also read “Finding the Best Mortgage Loan Rate.”

Mortgage closing costs are the payments you make when you finalize your purchase agreement. Costs vary by state and even by community. Some costs are determined by law, others by the lender, and some are simply customary in a particular region.

But there are some typical closing costs that you can expect and be prepared for in advance. Lenders are required by law to provide a good faith estimate of these costs. They should also notify you of any payment requirements; for example, if certain payments must be made by certified check. If you are working with a real estate attorney, he or she should walk you through the process in advance.

Typically, closing costs may include:

* Points. If you have chosen to pay points on your loan (or are required to by the terms of your loan), you’ll pay the points at the closing.
* Private mortgage insurance. Unless you are paying at least 20 percent as a down payment, you may be required to have private mortgage insurance, which protects the lender if you default on your loan. Private mortgage insurance usually costs one-half of 1 percent of the amount of the loan. How much you pay up front and how much you pay each month will vary.
* Loan origination fee. Your lender charges these fees for processing of the mortgage agreement and other paperwork.
* Escrow deposits for taxes. These will vary widely from state to state.

Mortgage closing costs are the payments you make when you finalize your purchase agreement. Costs vary by state and even by community. Some costs are determined by law, others by the lender, and some are simply customary in a particular region.

But there are some typical closing costs that you can expect and be prepared for in advance. Lenders are required by law to provide a good faith estimate of these costs. They should also notify you of any payment requirements; for example, if certain payments must be made by certified check. If you are working with a real estate attorney, he or she should walk you through the process in advance.

Typically, closing costs may include:

* Points. If you have chosen to pay points on your loan (or are required to by the terms of your loan), you’ll pay the points at the closing.
* Private mortgage insurance. Unless you are paying at least 20 percent as a down payment, you may be required to have private mortgage insurance, which protects the lender if you default on your loan. Private mortgage insurance usually costs one-half of 1 percent of the amount of the loan. How much you pay up front and how much you pay each month will vary.
* Loan origination fee. Your lender charges these fees for processing of the mortgage agreement and other paperwork.
* Escrow deposits for taxes. These will vary widely from state to state.
* Title insurance. This amount is determined based on the amount of the loan. Title insurance protects the buyer and the lender in the event that someone else has a deed or a claim to ownership of the property.
* Appraisal fees. This pays for the independent appraiser who estimates the value of the property. Your lender will use this valuation to determine if the property is valuable enough to serve as collateral for the mortgage loan.
* Title company closing or escrow fees. This charge is paid to the title company for handling the closing. The amount can vary widely.
* Inspections. While not included in closing costs, a general home inspection is standard, and often a pest inspection will also be conducted and paid for by the buyer.
* Property survey. The lender may require a survey or plot plan of the property before closing. This is conducted to assure that the boundaries in the purchasing agreement are correct.
* Homeowner’s insurance. This amount will vary considerably depending on the value of the home and will be paid for by the buyer.

Other fees may include a credit report fee, recording fees, and transfer taxes. You may also pay for flood insurance if your home is near the water.

Remember that closing fees are not all written in stone; many of the amounts are negotiable. Some are commonly paid by the buyer, others are split between the seller and the buyer, and some may even be paid by the lender. Ask your lender and your attorney about which fees can be negotiated and which are governed by state law.

In the end, closing costs should amount to somewhere between 2 to 7 percent of the price of the home.

Read “Choosing Rates vs. Points in a Mortgage Loan” and “Finding the Best Mortgage Loan Rate.”

There are many reasons homeowners refinance: to lock in a favorable interest rate, to withdraw equity they’ve built up in their home, or to pay off their mortgage more quickly. If you’re thinking about refinancing, here are some things you’ll need to consider:

* The interest rate of your current mortgage versus the current rate. If, for example, you see that rates have dropped two points, you’ll want to seriously consider refinancing.
* The type of loan you have. If you have an adjustable rate loan, you may want to refinance to switch to a fixed-interest loan.
* How long you plan to stay in your house. If you’re thinking of selling in the next three to five years, the amount you save on refinancing may not cover the costs associated with closing.

While refinancing will include closing fees, the goal is saving money over the long term. Closing fees are always part of the equation. Even mortgages that are advertised as having no-cost or low-cost closings have closing fees — they’re just not called closing fees.

Fees and paperwork aren’t the only drawbacks to refinancing, though. If your current mortgage agreement includes a prepayment penalty, you may lose money by refinancing unless you can negotiate with your lender to waive the prepayment clause.

Also, if you will be paying points on your new mortgage loan, you won’t be able to deduct the full amount on this year’s tax return. The IRS requires you to amortize the points over the life of the loan.

One way to save money and time is to refinance with the same lender who issued your original mortgage loan. They already have your paperwork, so you may not have to redo everything. You also have a relationship established, and that can help you while negotiating.

Refinancing isn’t something you should enter into lightly; it can be time-consuming and expensive. But once you run the numbers, you may find that the long-term savings will offset the costs related to refinancing. Then you can take the money you save each month from your reduced payments and put that to better use.

Read Finding the Best Mortgage Loan Rate and Choosing Rates vs. Points in a Mortgage Loan.

Among the many decisions you will have to make when choosing a mortgage loan is whether or not to pay points. While a very high credit rating may give you the option of a low rate with no points, some borrowers will elect to pay points to reduce their interest rates.

For example, let’s assume
you were shopping for a $180,000 mortgage. You might be offered a 30-year fixed-interest mortgage at a 6 percent interest rate with no points, or 5.65 percent with two points. A point is 1 percent of the amount of the loan; in this example, each point would be $1,800. Therefore, you would pay an additional $3,600 for the lower interest rate. Should You Pay Points on Mortgage Loans?

As is generally the case when mortgage shopping, part of the decision will come down to your current financial picture. If you have the money at the time of closing, after paying your closing costs and your down payment, you might very well want to pay for points.

The other key factor in your decision will be how long you plan to stay in the house. Unless you are planning to stay for more than five years, you will not benefit from paying points, because you will not be there long enough to cover the additional payment. Even if you are planning to stay put from five to seven years, you may not come out ahead. You will need to sit down with a calculator and determine whether you will benefit from paying points on your loan.

But over the long term, points can save you substantial amounts of money. If you are planning to stay in your home for 20 to 30 years, you should seriously consider paying points — but only if you have the money available when you close.

Returning to the example above, let’s assume that you are buying a $200,000 home, and putting down 10 percent, or $20,000. Closing costs generally run about 3 percent, or $6,000 in this case. What Are Mortgage Loan Closing Costs? Coming up with another 2 percent, or $3,600 may or may not be an option. The total of $29,600 can be a lot to pay at one time. And don’t forget to account for other costs associated with a new home, such as moving and furniture.

There are some financial advisors that will tell you that skipping points and paying the slightly higher interest rate is the better option. Their argument is that by putting the money into a higher yielding investment, you can use your money to make money. While this idea is potentially very sound, these short-term, high-yield investments are inherently risky. You will have to decide if you are comfortable with this level of risk.

Ultimately, the key factors in your decision will be how long you intend to occupy the house and whether or not you can afford the additional cash layout at the time of the closing.

As interest rates drop, many homeowners consider refinancing. And if you’ve inquired with a few lenders, you’ll probably start getting phone calls and e-mails daily about the proposition of doing so.

There are several reasons people consider refinancing, one of which is to take advantage of lower interest rates to either decrease their monthly mortgage payments, or shorten the terms of their loan.

One of the keys to refinancing is watching interest rate fluctuatations. Securing a low rate is not always easy. Daily bond fluctuations can serve as good indicators of the direction interest rates may be moving. However, since you can never be too sure, you may wish to lock in the lowest rate you see, which you can do more than a month before closing (which is essentially completing the refinancing process). If not, you’ll get locked into a rate five days prior to closing.

Similar to obtaining your first mortgage, you’ll need to reapply to refinance your mortgage. You can save on paperwork, and sometimes on fees, by staying with the same lender you used the first time. Knowing the degree of competition out there, it’s advantageous for your lender to try to give you a good deal. However, there are numerous lenders, and you can shop around, not only for a good rate, but also to save money on fees. The closing process, in which the mortgage ends with one lender and begins with a new lender, typically generates a number of fees that can, and often do, add up. Obtain a list of all potential fees and what they will likely be in advance. Ask for a quote that includes the appropriate fees.

If you’re planning to stay in your home for a number of years, it’s a good idea to take advantage of low interest rates. Just as when you obtained your original mortgage, you can also get points, which means paying off a percentage of your loan amount. If you have extra cash available, this can be helpful. Each point is one percentage of the total amount of your loan. By adding points, you can lower your interest rates.

You can also “cash out” by refinancing for more than the principal due on your original home loan. This is essentially a means of getting some cash as a tax-free loan on the difference between the value of the house now and its value from the initial mortgage. For example, if you have a mortgage balance of $100,000 and your property is now worth $300,000, you could refinance for $175,000 and have $75,000 to keep tax-free, less the transaction costs and fees. According to Freddie Mac, one of the nation’s premiere mortgage secondary lenders, nearly 60 percent of refinancing today is for the purpose of cashing out.

Choosing a mortgage loan is not as easy as simply finding the lowest interest rate. There are many other factors that will determine which mortgage is right for you. Your financial picture, including your income, savings, cash reserves, and debt-to-cash ratio will determine how much you can afford to pay in monthly mortgage payments. Finding the “best” mortgage means balancing your mortgage options with your financial situation and your housing needs, now and in the future.

Since even the shortest mortgages typically last at least 15 years, you will need to project how your financial situation and your housing needs may change over the life of the mortgage. How long do you intend to live in the house? Do you anticipate significant expenses in the near future, such as college tuition costs? Are you starting a business that may require significant funding? Do you expect your income to increase over time, which may allow you to pay more toward your mortgage each month? Planning for these eventualities will help you determine how much you can afford to allocate toward your mortgage.

Next you will need to consider the level of risk you feel comfortable taking. Different types of loans carry different levels of risk. For example, an adjustable rate mortgage is more risky because the interest rate will change, while a fixed-rate loan offers more stability because of the locked-in rate.

Determining the life of your loan — 15, 20, or 30 years — and selecting a fixed or adjustable interest rate will typically be decisions that you will make. You will be able to pay off a shorter-term loan more quickly, but your monthly payments will be higher. Long-term fixed-rate loans are popular because they offer certainty, and many people find that they are easier to fit into their budget. But the prospect of taking 30 years to pay off a loan can be daunting.

You will need to give serious thought to all these factors, plus closing costs, in addition to looking for the lowest interest rate. The key to mortgage shopping is to find a loan that fits comfortably into your entire financial situation.

Of course, not all of these decisions will be in your hands. First you will need to get a lender to approve your application. Depending on your credit rating and other factors, they will offer you loans that they feel are within their level of risk — loans they believe you will able to repay. The lender will adjust interest rates, points, and other factors in accordance with the level of risk they believe you pose. From there you will need to choose a loan that fits you financially and personally.

Read “Finding the Best Mortgage Loan Rate” for more resources.

“APR” stands for annual percentage rate. The APR is a much better indicator than just the interest rate of the actual cost of a mortgage loan, as it estimates what you’ll pay over the course of an entire year. The Federal Truth in Lending law requires mortgage companies to list the APR of their loans when they advertise an interest rate. This prevents them from advertising unduly low interest rates and tacking on fees and other costs that drive up the real cost of the loan.

The APR therefore takes into consideration other fees and costs including:

Discount points. Commonly referred to simply as “points,” these are increments of 1 percent of the mortgage that you pay off at the closing. If points are not required, and you elect to pay off points to lower your interest rate, it will not be included in the APR. However, if you’re required to pay off points, this cost will be factored in when your APR is calculated.

Origination fees. Often confused with points, this is a fee the lender charges for work they perform on the borrower’s behalf.

Mortgage insurance premiums. This is insurance against defaulting on payment of the loan. Your lender may require you to pay mortgage insurance if your down payment is less than 20 percent of the selling price of the home.

Prepaid mortgage interest. Since interest is generally paid on a monthly basis, prepaid mortgage interest is paid at closing to cover the gap between the time you close and the first of the next month.

The APR your lender quotes you will include other fees too, but APR doesn’t tell the whole story. There are other fees and costs, such as title insurance, that are still not included in the calculation. And in the end, APR is nothing more than an estimate of the various costs of your loan, including the interest rate. It is not an exact science, since some of the numbers will vary between the time of calculation and the time of closing. Nonetheless, it’s a step in the right direction, and one place to start when comparing lenders and the loans they offer.

To show how the APR can be used for comparison purposes, here’s a simple example. You are shopping for a 30-year mortgage for $100,000.

* Bank “A” offers a 30-year fixed mortgage at a 6 percent interest rate.
* Bank “B” quotes a 30-year fixed mortgage at a 5 percent rate.

Your first instinct would be to go with Bank “B” because of the lower rate. However, Bank “B” charges a $2,000 origination fee, and you are required to pay four points, or $4,000, on your $100,000 loan. Bank “A” has no origination fee, and requires you to pay no points. Suddenly you will be paying $6,000 more if you go with bank “B”. The APR will factor this into the overall equation, and Bank “A” will have the lower, and potentially more attractive, APR.

Many Internet sites have APR calculators where you can enter various fees and determine which loan appears better for your purposes. Remember to compare similar loans, such as two 30-year fixed mortgages.

Read Finding the Best Mortgage Loan Rate and Choosing Rates vs. Points in a Mortgage Loan for more information.

There are many factors to consider when shopping for a mortgage, but interest rates almost always take center stage. Interest rates fluctuate depending on many factors in the economy, including the prime rate, Treasury bill rates, the federal fund rate, the federal discount rate, certificate of deposit (CD) rates, Fannie Mae-funded security rates, and Ginnie Mae-funded security rates.

Supply and demand can also have an effect. In a good economy, demand for mortgages is usually stronger, so the interest rate usually climbs. Conversely, if the economy is doing poorly, there is less demand for mortgages, so interest rates typically drop. This is good for the home buyer who has enough money for a down payment, despite the poor economy.

By looking at the fluctuations in the recent economy and interest rates, it’s easy to see how they coincide. In 1997, when the overall economy was doing well, the interest rates were up around 7.5 percent. By 2000, just prior to the downturn in the market and subsequently in the overall economy, interest rates topped 8 percent. However, as the market began to drop and the economy took a turn for the worse in early 2001, the interest rate dropped. By the end of 2001, rates were in the mid-6-percent range. By 2003, they had dropped to the mid-to-high 5 percent range, where they remained through 2004. When the economy gets stronger, interest rates move up, along with your investments.

So why don’t all banks and mortgage brokers offer the same rates? While all lenders’ rates are based on the same factors, lenders can still set their rates wherever they want. They must cover their operating expenses, gird against the risks inherent in loaning money, and turn a profit — all while trying to compete with other lenders. See What Is APR for Mortgate Loans for more information.

When it comes to mortgage rates, the only thing you can depend is that they will change. Sometimes they will change for the better, and sometimes for the worse. But if you find a house you love, don’t pass it up because you are waiting for mortgages to drop another .25 percent. You can always refinance your mortgage if there’s a significant change.

Not everything happens quickly in the real estate market. It can sometimes take a few days from the time you read about a drop in interest rates until it’s reflected in the rates you are quoted. After all, it has to trickle down from the investors to the mortgage retailers to the lenders — before it’s passed on to you.

Read “Finding the Best Mortgage Loan Rate” for links to resources.

Mortgage refinance is the process of taking out a new loan, and using the proceeds to pay off your old one. Generally, you’d do this to make a change in the structure of your debt in order to get more money, a lower monthly payment, or a shorter pay-off schedule.

Why refinance?

You’d trade-up your mortgage for the same reason that you’d trade-up your job, car, or living arrangement-because circumstances change. What you need out of a mortgage today may be different from what you needed five years ago. Refinancing can achieve one or more of the following objectives:

1. Lower your monthly payment. You can reduce your monthly payment by refinancing to a lower interest rate. Have market rates dropped since your old mortgage was funded? Has your credit improved? Has your home increased in value? Any one of these happenings could mean that you’d qualify for a lower rate.

2. Shorten your pay-off term. Paying off your mortgage loan in 15 years rather than in 25 can save you tens of thousands of dollars in interest over the life of the loan. If you can afford the higher monthly payment and plan to stay in the home indefinitely, it’s well worth it.

3. Optimize your loan structure. Your current loan structure may no longer be suitable for you in the future. Maybe you bought your home with an adjustable-rate mortgage (ARM) and your initial fixed-interest period is about to expire. Perhaps you have a fixed-rate mortgage, but you’d like to take advantage of the more flexible option ARM. Discuss your objectives with your lender to determine the most appropriate loan structure for you.

4. Consolidate your debt. If you’re carrying a lot of credit card debt, you can lower your monthly repayments through consolidation. To do this, you’d take out a mortgage loan large enough to pay off all the debts on your cards plus the balance on your old mortgage.

5. Fund large, one-time expenses. You can raise the funds you need by doing what’s called a cash-out refinance, where you’d take out a loan that’s larger than your current one. As soon as you pay off the old loan, the excess funds can be used to pay for home improvement projects, college tuition, your daughter’s wedding, long-term care expenses, etc.

Essentially, your mortgage is a financial tool that might need occasional sharpening. As life throws you new circumstances, trading up that mortgage may be one way to manage change.