Buying a Home - Comparing Loan Costs.
Comparing APRs may be an effective way to shop for a loan when buying a home. However, you must compare similar loan products for the same loan amount.
For example, compare two 30-year fixed rate loans for $100,000. Loan A with an APR of 8.35% is less costly than Loan B with an APR of 8.65% over the loan term.
However, before you decide on a loan, you should consider the up-front cash you will be required to pay for each of the two loans as well.
Another effective shopping technique is to compare identical loans with different up-front points and other fees.
For example, if you are offered two 30-year fixed rate loans for $100,000 and at 8%, the monthly payments are the same, but the up-front costs are different:
Loan A - 2 points ($2,000) and lender required costs of $1800 = $3800 in costs.
Loan B - 2 1/4 points ($2250) and lender required costs of $1200 = $3450 in costs.
A comparison of the up-front costs shows Loan B requires $350 less in up-front cash than Loan A.
However, your individual situation (how long
you plan to stay in your house) and your tax situation (points can usually
be deducted for the tax year that you purchase a house) may affect your
choice of loans when buying a home.
"Locking in" your rate or points at the time of application or
during the processing of your loan will keep the rate and/or points from
changing until settlement or closing of the escrow process. Ask your
lender if there is a fee to lock-in the rate and whether the fee reduces
the amount you have to pay for points. Find out how long the lock-in is
good, what happens if it expires, and whether the lock-in fee is
refundable if your application is rejected.
and Insurance Payments. Your monthly mortgage payment will be used to repay the money you
borrowed plus interest. Part of your monthly payment may be deposited into
an "escrow account" (also known as a "reserve" or
"impound" account) so your lender or servicer can pay your real
estate taxes, property insurance, mortgage insurance and/or flood
insurance. Ask your lender or
mortgage broker if you will be required to set up an escrow or impound
account for taxes and insurance payments.