A Guide to Mortgage Shopping

Fixed-rate mortgages are best when interest rates are low and you plan to stay in the home for a long time. That way you lock in a good deal and your monthly payments stay steady for the life of the loan. When rates are rock bottom, I see no reason to pay points. A point is a fee equal to 1 percent of the purchase price of the home. It's used to "buy down" the interest rate. If the rate is already low and fixed, you don't need to make it any lower. Some brokers and lenders will try to get you to pay points anyway, because typically points generate more up-front profit for them.

Adjustable-rate mortgages, or ARMs, work well when interest rates are high and/or you don't plan to live in the house very long. ARMs typically start with a lower, "teaser" rate, which can help you make your monthly payments. It can also help you qualify for a more expensive home than you would with a fixed-rate loan. It's a bit of a gamble. You're hoping that interest rates will go down before it's time for your adjustable-rate mortgage to adjust. That way you can refinance and get a decent fixed rate. Alternatively, you can sell the home before your rate goes up. Most ARMs have a maximum cap for your protection. To be fair, an ARM should adjust upward and downward, depending on market conditions. But some predatory lenders sell adjustable rate mortgages that start high, only adjust upward, and have no cap.

The Federal Trade Commission cautions borrowers against what it calls "creative financing" packages.

Example 1: A loan that starts out below-market, but in which both the interest rate and the monthly payment grow every year for the remainder of the loan, regardless of market conditions.

Example 2: Some mortgages have high interest rates but still offer low monthly payments. If the payments are not enough to cover the principal and interest, the difference is added to the principal. You could actually end up owing more at the end of the loan term than you did in the beginning.

Example 3: To keep early payments low, some lenders ask borrowers to make a "balloon" payment at the end of the loan. The amount is usually so massive that the borrowers have to refinance. That generates more closing fees for the lender and exposes you to whatever the going interest rate is, which may not be at all favorable.

Once you've chosen a lender or broker, you need to decide whether to "lock in" today's going interest rate, or gamble that rates will go down between now and your closing. Have the lender or broker sign a lock-in document that states the interest rate and number of points you will be paying. That way, even if rates go up, you are set. Most banks will only guarantee an interest rate for 60 days. If you feel strongly that interest rates will go down before you close, you can choose to "float" your interest rate. You can also request a deal in which the interest rate can decrease, but not increase while you wait to close. Not all banks offer this service, so you might want to find one that does.

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