A mort­gage lender might adver­tise a great rate but charge a ton of money in clos­ing costs, or promise a bor­rower great terms but then present dif­fer­ent num­bers in the paper­work

Amy Fontinelle – Investo​pe​dia​.com

If you’ve never bought a home before, when you first start shop­ping for a mort­gage it might seem like the obvi­ous way to choose a lender is to pick the one that offers the low­est inter­est rate. After all, the inter­est rate on your mort­gage will affect both your short-term and long-term finan­cial well-being because it will deter­mine your monthly mort­gage pay­ment and the total amount you’ll pay for your home.

Lit­tle Things Make a Big Difference

Con­sider this exam­ple: Take out a $200,000, mort­gage at 6.5% inter­est and you’ll pay $1,264.14 a month and $455,090.40 (plus your down pay­ment) over the life of the mort­gage. Take out that same mort­gage at 5.5% and you’re look­ing at a mort­gage pay­ment of $1,135.58 and a total cost of $408,808.80, or a sav­ings of $128.56 a month and $46,281.60 over 30 years. Even small dif­fer­ences in inter­est rates, like 6.5% ver­sus 6.2%, can make a big dif­fer­ence. In this case, the 6.2% mort­gage rate would save you $39.20 a month and $14,112 over 30 years.

How­ever, tak­ing out a mort­gage is a major finan­cial deci­sion, and one that, espe­cially for first-timers, is fraught with poten­tial pit­falls. Just as you con­sider more than just the sticker price when you shop for a car because fac­tors like safety, fuel econ­omy and reli­a­bil­ity are also impor­tant, inter­est rate is only one thing you should con­sider when shop­ping for your mort­gage. (Learn more about find­ing the right mort­gage in Shop­ping For A Mortgage.)

Why Low Inter­est Rates Aren’t Always a Bargain

Here are some of the other fac­tors you should con­sider and why they matter.

1. Teaser Rates
These attrac­tively low adver­tised inter­est rates are often just a way to get you in the door. The truth about mort­gage rates is that they change mul­ti­ple times a day. If you con­tact a lender based on a rate they’ve adver­tised, the odds of you actu­ally get­ting that rate are slim.

2. Fees
There are many costs asso­ci­ated with tak­ing out a mort­gage besides the inter­est rate, like clos­ing costs. Just as the gro­cery store tries to get you in the door by adver­tis­ing a gal­lon of milk for $2 but then wants to charge you $5 for the cereal to pour it on, a bank might adver­tise a lower inter­est rate than its com­peti­tors but then expect you to pay dou­ble the clos­ing costs you might pay else­where. Points are another area where lenders can make up for low inter­est rates by charg­ing bor­row­ers higher fees. How­ever, infor­ma­tion on fees isn’t likely to be avail­able up front – the only way to find out about these costs is to talk to a lender and have them pre­pare a good faith esti­mate for you.

3. Type of Loan
What type of loan you qual­ify for will affect your inter­est rate. That great mort­gage rate that you see adver­tised might be for a 5-year fixed con­ven­tional mort­gage, but your income and sav­ings might not qual­ify you for that mort­gage. Your mort­gage will have a higher inter­est rate and a higher long-term cost.

4. Credit Score
The best adver­tised rates only go to bor­row­ers with the best credit scores. The fur­ther below 720 your credit score is, the less likely you are to get a rate sim­i­lar to the adver­tised rate.

5. Lend­ing Insti­tu­tion Rep­u­ta­tion
Just because you’ve never heard of a par­tic­u­lar lend­ing com­pany doesn’t mean that it’s up to no good, and just because it’s a nation­ally rec­og­nized name doesn’t always mean it’s a safer choice. Regard­less of the lender you’re con­sid­er­ing, do some research to deter­mine how likely you are to get a fair deal when work­ing with that com­pany. The lender who adver­tises the best rates is not always a lender who will give you a fair deal.

6. Loan Rep­re­sen­ta­tive
At least as impor­tant as your choice of lend­ing insti­tu­tion is the spe­cific per­son you work with in that com­pany. Unscrupu­lous peo­ple can work for stel­lar com­pa­nies, and peo­ple who always put their cus­tomers’ best inter­ests first can work for shady insti­tu­tions. This is why the spe­cific per­son who han­dles your mort­gage for you needs to be some­one you trust. Whether this per­son is com­pe­tent and eth­i­cal in qual­i­fy­ing you for a mort­gage, sell­ing you a par­tic­u­lar mort­gage prod­uct, and prepar­ing your mort­gage paper­work will have a major impact on your life.

Just ask the peo­ple who ended up with mort­gages they didn’t under­stand and ulti­mately couldn’t afford and today have fore­clo­sures blem­ish­ing their credit reports and are back to rent­ing or even liv­ing with rel­a­tives to get by. They all prob­a­bly wish they had looked at more than just the inter­est rate when they took out their mortgages.

Con­clu­sion
Mort­gage rates change mul­ti­ple times a day, and they vary depend­ing on your geo­graphic loca­tion, the type of loan you want and your credit score. Per­haps most impor­tantly, they don’t tell the whole story about the cost of a loan. A mort­gage lender might adver­tise a great rate, but charge a ton of money in clos­ing costs, or promise a bor­rower great terms, but then present dif­fer­ent num­bers in the paper­work at clos­ing when emo­tions are run­ning high and time is of the essence. Look­ing at the whole loan pack­age, not just the inter­est rate, will help you get the best deal.

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