As much as we all want life to be simple and easy, it just isn't most of the time. For a topic so complex as financing, we'll attempt to break down some of the massive amount of information into easier to understand terms.

You can literally save thousands of dollars!
The price and terms of a mortgage are negotiable, like any other product. Do your comparison shopping up front. Don't wait until you found a house you just have to have. To get the best mortgage for your home, you have to shop around. Don't hesitate to ask the lender how one loan differs from another and how different features of the loan will affect the mortgage. Ask questions until you are confident that you understand all the terms of that loan. When you're shopping around, you will find that some home mortgage lenders have special programs to assist veterans and low-income or first-time home buyers. Ask the lender if such programs are available.

Before you being your shopping spree…
Know your stuff. To make the best educated decision on a mortgage, you need to first understand them. Of course, you'll need to know how much of a down payment you can afford. Knowing the amount of the monthly payment and the interest rate is obviously important along with any other costs involved. Make sure you get a comparison for each loan amount, terms, and type of loan so that you can get a better picture. Most importantly, you'll want to look at the bottom line for the full cost of the mortgage. Download this checklist and keep handy for making notes on the information you've gathered.

THE BASICS

Length of the Loan
The longer the term and the larger the down payment, the smaller your monthly payments will be. With a shorter term loan, you will have higher payments. But you will pay the principal down much faster resulting in the total interest being dramatically lower.

The Interest Rate
The interest rate will determine how much you will pay the bank to use their money. This is really important to find ways to save money in this deal. Make sure to look at the bottom line after the mortgage is satisfied. We cover the different types of loans and interest rates in the next section.

• Ask each lender and broker for a list of its current mortgage interest rates and whether the rates being quoted are the lowest for that day or week.
• Ask whether the rate is fixed or adjustable. Keep in mind that when interest rates for adjustable-rate loans go up, generally so does the monthly payment.
• If the rate quoted is for an adjustable-rate loan, ask how your rate and loan payment will vary, including whether your loan payment will be reduced when rates go down.
• Ask about the loan's annual percentage rate (APR). The APR takes into account not only the interest rate but also points, broker fees, and certain other credit charges that you may be required to pay, expressed as a yearly rate.

The Down Payment
In some cases, making a high down payment can get you better interest rates. Making a higher down payment may also increase your chances of qualifying. Some lenders require 20% of the purchase price as a down payment. However, many lenders offer loans that require as little as 5% on conventional loans. If a 20% down payment is not made, lenders usually require the home buyer to purchase private mortgage insurance (PMI) to protect the lender in case the home buyer fails to pay. When government-assisted programs such as FHA (Federal Housing Administration), VA (Veterans Administration), or Rural Development Services are available, the down payment requirements may be substantially smaller.

Points
Points are fees paid to the lender for the loan. One point equals 1% of the loan amount. Points are usually paid in cash at closing. In some cases, the money needed to pay points can be borrowed, but doing so will increase the loan amount and the total costs. The fees paid to the lender or broker for the loan and are often linked to the interest rate; usually the more points you pay, the lower the rate. Check your local newspaper for information about rates and points currently being offered.

Fees
A home loan often involves many fees, such as loan origination or underwriting fees, broker fees, and transaction, settlement, and closing costs. Every lender or broker should be able to give you an estimate of its fees. Many of these fees are negotiable. Some fees are paid when you apply for a loan (such as application and appraisal fees), and others are paid at closing. In some cases, you can borrow the money needed to pay these fees, but doing so will increase your loan amount and total costs. “No cost” loans are sometimes available, but they usually involve higher rates.

• Ask what each fee includes. Several items may be lumped into one fee.
• Ask for an explanation of any fee you do not understand. Some common fees associated with a home loan closing are listed on the Mortgage Shopping Worksheet in this brochure.

LOAN TYPES

Fixed Rate Mortgages
A Fixed Rate Mortgage simply means the interest rate is fixed and will not change for the duration of the loan. The payments will be divided equally and paid until the loan is paid off. They are typically 10, 15 or 30 year loans. A Balloon loan is a Fixed Rate Mortgage. However, the payments will be paid for a shorter term with the balance due at a set time. Some lenders will include homeowners insurance or property taxes in the payment. The amount will be estimated and divided equally over the year. As those amounts vary, the payments may also.

Adjustable Rate Mortgages

Then there are the Adjustable Rate Mortgages, (ARMs), which typically have a lower interest rate up front. However they fluctuate depending on the current interest rates. The terms of these loans vary but basically, the payment may increase as interest rates increase. Make sure there is a maximum rate and that you will be able to afford the payment at it's maximum.

Fixed/ARM Hybrids

This is a convertible mortgage that has a combination of fixed and variable rates:

• A Fixed Period ARM gives you a few years at a fixed rate, then the rate adjusts according to an economic index it is tied to, this will cause your payments to fulctuate. Another type of ARM is Fixed Period. With a Fixed Period mortgage, the rate is fixed for a few years at the beginning but will adjust once, normally in the 13th to 60th month of the loan.
• A Convertible ARM begins as standard ARMs, but you have the option of converting into a Fixed Rate Mortgate at sometime in the future at the then current interest rate.

Of all these types, the above are two categories, which can change a lot about the loan.

Conventional Mortgages
This is the most common mortgage type. They are simply loans not guaranteed by a government agency. There is much more flexibility for terms and property guidelines, but because the loan isn't guaranteed by the government, qualification can be more difficult and typically require larger down payments.

Government Funded
Some lenders offer mortgage loans backed by a federal agency such as the FHA (Federal Housing Administration), the VA (Veterans Administration), or the Rural Development Services (formerly know as Farmers Home Administration, or FmHA). Insured mortgages may be more attractive than conventional mortgages in some ways--such as lower down payment requirements. But they may be more restrictive in other ways; for example, they may be available only for certain kinds of homes, or for properties whose value is below a specified price.

FHA Loans The Federal Housing Administration (FHA), which is part of the U.S. Dept. of Housing and Urban Development (HUD), provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA insures mortgages on single family and multifamily homes. Because FHA insures your mortgage, lenders are more willing to give loans with lower qualifying requirements so its easier to qualify, even if you have had credit problems, such as bankruptcy. FHA loan programs also offer lower down payments (which can come from charitable sources) making it a good option for first-time home buyers. For more information, see the HUD site. VA Loans These guaranteed loans are made by private lenders, such as banks, savings & loans, or mortgage companies to eligible veterans for the purchase of a home which must be for their own personal occupancy. These loans are often made without any down payment at all. Aside from the veteran's certificate of eligibility and the fact that the appraiser is assigned by VA, the application process is not much different than any other type of mortgage loan. For more information, see the VA site. RHS Loan Programs The Rural Housing Service (RHS) of the USDA guaranteed loans are available for home in rural areas. These loans offer 100% financing, no maximum purchase price limit with competitive fixed 30-year rates. In addition closing costs can come from any source including gifts and repairs and improvements can be included in the loan. For more information, start with the FAQ page on the site. State and Local Housing Programs Many states and local government agencies offer housing programs, often with more lenient qualification guidelines. These programs vary but typically assist with down payments and offer lower interest and fees.

Now that you understand everything there is to know about mortgage loans…

WHERE WILL YOU SHOP?

Start by gathering information. Don't make a decision until you feel you have enough information to do some educated comparisons. The are many types and sources for mortgage lenders. Make sure you are dealing with a reputable source. It is helpful if you have a relationship someone at your bank. That's a good place to start. But don't limit yourself. The mortgage industry is vast. Explore. Check with savings and loan associations, commercial banks, mutual savings banks, and mortgage companies.

There is, of course, your local newspaper and the Internet. You can usually find information on interest rates and points for several lenders. Since rates and points can change daily, you'll want to check for changes. Just because the advertisements don't mention fees and additional costs, they probably do.

Mortgage brokers aren't money lenders. A broker's task is to do the shopping for you and help complete the transaction. With access to multiple lenders, it can mean a larger selection of loans. However, they are not obligated to find the best deal for you unless they have contracted to act as your agent. Consequently, you should consider contacting more than one broker. Some financial institutions operate as both lenders and brokers. The advertisements don't always use the word “broker.” Therefore, be sure to ask whether a broker is involved. Brokers are typically paid a fee for their services that may be in addition to and sometimes separate from the lender's origination or other fees. It could be in the form of “points” paid at closing or as an add-on to your interest rate, or both. You should ask each broker you work with how he or she will be compensated so that you can compare the different fees. Don't forget, you can negotiate the terms.

Negotiate

Now, take this information and get yourself the best deal possible. Make sure you let each lender or broker know that you are shopping for the best deal. On any given day, lenders and brokers may offer different prices for the same loan terms to different consumers, even if those consumers have the same loan qualifications. Generally, the difference between the lowest available price for a loan product and any higher price that the borrower agrees to pay is an overage. When overages occur, they are built into the prices quoted to consumers. They can occur in both fixed and variable-rate loans and can be in the form of points, fees, or the interest rate. Whether quoted to you by a loan officer or a broker, the price of any loan may contain overages.

Have the lender or broker write down all the costs associated with the loan. Then ask if the lender or broker will waive or reduce one or more of its fees or agree to a lower rate or fewer points. You'll want to make sure that the lender or broker is not agreeing to lower one fee while raising another or to lower the rate while raising points. There's no harm in asking lenders or brokers if they can give better terms than the original ones they quoted or than those you have found elsewhere.

Once you are satisfied with the terms you have negotiated, you may want to obtain a written lock-in (a written agreement guaranteeing a specific terms provided the loan is closed within a certain period of time). The lock-in should include the rate that you have agreed upon, the period the lock-in lasts, and the number of points to be paid. A fee may be charged for locking in the loan rate. This fee may be refundable at closing. Lock-ins can protect you from rate increases while your loan is being processed; if rates fall, however, you could end up with a less favorable rate. Should that happen, try to negotiate a compromise with the lender or broker.

Fair Lending Is Required by Law

The Equal Credit Opportunity Act prohibits lenders from discriminating against credit applicants in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, age, whether all or part of the applicant's income comes from a public assistance program, or whether the applicant has in good faith exercised a right under the Consumer Credit Protection Act.

The Fair Housing Act prohibits discrimination in residential real estate transactions on the basis of race, color, religion, sex, handicap, familial status, or national origin. Under these laws, a consumer cannot be refused a loan based on these characteristics nor be charged more for a loan or offered less favorable terms based on such characteristics.

Credit Problems?
Still Shop, Compare, and Negotiate

Don't assume that minor credit problems or difficulties stemming from unique circumstances, such as illness or temporary loss of income, will limit your loan choices to only high-cost lenders.

If your credit report contains negative information that is accurate, but there are good reasons for trusting you to repay a loan, be sure to explain your situation to the lender or broker. If your credit problems cannot be explained, you will probably have to pay more than borrowers who have good credit histories. But don't assume that the only way to get credit is to pay a high price. Ask how your past credit history affects the price of your loan and what you would need to do to get a better price.

Glossary

Here are some terms you may hear throughout the process.

• Escrow is the holding of money or documents by a neutral third party prior to closing. It can also be an account held by the lender (or servicer) into which a homeowner pays money for taxes and insurance.
• Loan origination fees are fees charged by the lender for processing the loan and are often expressed as a percentage of the loan amount.
• Thrift institution is a general term for savings banks and savings and loan associations.
• Transaction, settlement, or closing costs may include application fees; title examination, abstract of title, title insurance, and property survey fees; fees for preparing deeds, mortgages, and settlement documents; attorneys' fees; recording fees; and notary, appraisal, and credit report fees. Under the Real Estate Settlement Procedures Act, the borrower receives a good faith estimate of closing costs at the time of application or within three days of application. The good faith estimate lists each expected cost either as an amount or a range.