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If you’re house hunting, unless you’re one of the fortunate few who can afford to purchase your home outright, chances are you’re also looking for a mortgage. Here are some areas you should research to ensure you’re making the wisest financial decision. After all, your mortgage has the power to either make you a happy homeowner, with solid equity in your home, or drain you financially.

• Research current interest rates. Most Sunday newspapers, in either the real estate or business sections will have a listing of area mortgage companies and other financial institutions that offer mortgages. All the pertinent information will be listed such as terms, points, and APR. There is also a wealth of information available online, or you can call your bank and local mortgage companies directly.
• Check the rates for 30-year, 20-year and 15-year mortgages. You may be able to save thousands of dollars in interest charges by getting the shortest-term mortgage you can afford. Another option is to get a longer term loan, with its lower payments, and then pay additional money toward the loan principal. This gives you the flexibility of having a lower payment, but paying off the loan more quickly. Typically you’ll pay a higher interest rate on the longer term mortgage, reflecting the lender's additional risk. The aforementioned approach is only for those with the requisite financial discipline to make it work, however. It is vital to check with your mortgage holder to ensure your mortgage doesn’t have any prepayment penalties, however(see below).
• Ask for details on the same loan amount, loan term, and type of loan from multiple lenders so that you can compare the information. Be sure to get the Annual Percentage Rate (APR) which takes into account not only the interest rate but also points, broker fees, and other credit charges expressed as a yearly rate.

How does APR differ from the interest rate of the mortgage? The APR includes the principal, plus the fees associated with the loan, when cmaking the calculations. It’s designed to make it easier for consumers to compare different loans or mortgages, but it is not so straightforward. Because there is no standard on what fees must be included when calculating the APR, you can’t always directly compare different mortgage’s APRs. In addition, mortgages of different lengths cannot be compared, because the fees are amortized over different time periods. This makes the APR on a shorter mortgage with the same interest rate and fees be higher.

• Ask whether the rate is fixed or adjustable. The interest rate on adjustable rate mortgage loans (ARMs) can vary a great deal over the lifetime of the mortgage. An increase of several percentage points might raise payments by hundreds of dollars per month. These can be a great way to get into a home at an affordable monthly payment, but be extremely careful when using ARMs. By definition they’ll adjust, and you could get yourself in trouble when your mortgage payments rise.

If you plan on staying in your home only a few years, an ARM may be a good choice. If you plan on staying longer, however, you may want to consider a fixed mortgage. When looking at adjustable rate mortgages, you’ll often see figures such as 3-1 or 5-1. These refer to the initial period, where interest rate you’ll be paying is the same as the day you inked the contract. The second number is how often, after the initial period expires, the mortgage interest rate can be adjusted. A 5.4%, 3-1 ARM for example, would have a 5.4% rate for the first 3 years, and then be subject to an annual rate adjustment. In a time of rising interest rates, many people can become trapped with a much larger house payment than they were anticipating.

• If a loan has an adjustable rate, ask when and how the rate and loan payment could change.
• Find out how much down payment is required. Some lenders require 20 percent of the home's purchase price as a down payment. But many lenders now offer loans that require less. In these cases, you may be required to purchase private mortgage insurance (PMI) to protect the lender if you fall behind on payments. This is one of the instruments used to make mortgages, and thus homeownership, available to more people. Before PMI, many people would have a much more difficult time qualifying for a mortgage. The good news is that, when your home equity increases by a sufficient amount, you can dispense with your PMI and it’s payment.
• If PMI is required, ask what the total cost of the insurance will be. How much will the monthly mortgage payment be when the PMI premium is added and how long you will be required to carry PMI?
• Ask if you can pay off the loan early and if there is a penalty for doing so.

NOTE:

The Real Estate Settlement Procedures Act (RESPA) requires lenders to give you information on all closing costs and escrow account practices. Any business relationships between the lender and closing service providers or other parties to the transaction must also be disclosed. Many of the fees are negotiable.