You can save real money if you carefully shop for a mortgage. Even a one-quarter percentage point difference in interest rates can mean savings of thousands of dollars over the life of the loan.
Banks, credit unions, savings and loans, insurance companies, and mortgage bankers all make home mortgage loans. The terms change frequently, so it's good to compare at least a half-dozen lenders -- or to get the help of an experienced mortgage broker, who can help you sift through the latest offerings.
Start by deciding what type of mortgage you're interested in, whether it's a fixed rate, adjustable rate, or one of the many hybrids available. (See Fixed Rate vs. Adjustable Rate Mortgages.) Once you've narrowed your sights -- for example, to a 30-year fixed rate mortgage for $300,000 -- you'll be ready to compare apples to apples, using the research tools described below.
First-timer? Some lenders offer programs with low down payment plans and flexible qualifying guidelines for low- and moderate-income first-time buyers with good credit.
Mortgage rates and fees are usually published in the real estate sections of metropolitan newspapers. Take a look at these, even if you decide to work with a broker, so that you'll have a sense of the mortgage market in your area. (But realize that they usually publish the best rates, available only to people with great credit.)
A Mortgage Broker
Good brokers are trained to scour the entire market for the best loan at the lowest interest rate. Most brokers collect a fee from the lender (though this ultimately adds a little to what you pay for your mortgage); other brokers charge the consumer directly. The broker can also help you with the paperwork and advise you on how to present your financial situation in the best possible light to lenders, so that you qualify for the loan you want.
Your Local Bank or Credit Union
If you have a bank you trust, or are a member of a nonprofit credit union, stop by and ask about its offerings (or check its website). But be aware that you'll be offered a limited menu, consisting of only that bank or credit union's loan products.
Friends and Relatives
Private sources of money -- parents, other relatives, friends, or even the seller of the house you want to buy -- are a widely used source of home loan money. For more information, see Borrowing From Family and Friends to Buy a House.
Online Mortgage Sites
While most customers prefer to complete their loan transaction with a live mortgage broker or lender, there's a lot of valuable information online.
Start with some basic research, on no-loan sites such as HSH Homeplans (www.hsh.com), Bank Rate Monitor (www.bankrate.com), Mortgage Bankers Association of America (www.mbaa.org), and government sites such as Fannie Mae (www.fanniemae.com), Freddie Mac (www.freddiemac.com), and the U.S. Department of Housing and Urban Development (www.hud.gov). These places keep daily tabs on mortgage rates and offer online mortgage calculators and other tools.
Online mortgage loan sites that offer direct access to loans come in three basic varieties: direct or single lenders, auction sites, and multilender shopping sites.
Most are direct lender sites, for example by Wells Fargo (www.wellsfargo.com) and Bank of America (www.bankofamerica.com). However, these lenders rarely provide complete product information (points, fees, lock periods, and the like) online. For that, you'll need to call or visit in person.
At auction sites, you complete a loan application, which is then sent to lenders who compete for your business. You must wait a day or so to receive their offers. To compare more loans, you'll have to repeat the process on each site. Auction sites include LendingTree.com, GetSmart.com, and RealEstate.com.
With multilender sites, you don't need to complete an application before you shop. Instead, you enter the loan amount, property details, and other information, and get current rates, APR, points, even settlement costs from dozens of lenders. Examples include Quicken Loans (www.quickenloans.com) and E-LOAN www.eloan.com. If you choose to complete an application, these sites will process your documentation and forward everything to the lender. Be warned, however -- many consumers report dissatisfaction with multilender sites, saying that they get second-class treatment from the lender.
Beware of come-ons. Use the same diligence when you shop online as you would shopping elsewhere. Watch out for teaser-rates, bait-and-switch tactics, and small print games.
Government Loan Programs
Several federal, state, and local government financing programs are available to homebuyers. The two main federal programs are:
VA loans. U.S. Department of Veterans Affairs (VA) loans are available to people in the military and to veterans with honorable discharges who meet specific eligibility rules. The VA doesn't make loans, but guarantees part of the loan you get from a regular private lender. If you default, the VA pays the lender the amount guaranteed and you, in turn, will owe the VA. This guarantee makes it easier for veterans to get favorable loan terms. For more information, check www.va.gov or contact a regional VA office.
FHA loans. The Federal Housing Administration (FHA), an agency of the Department of Housing and Urban Development (HUD), also offers guaranteed, low down payment loans made to U.S. citizens, permanent residents, and noncitizens with work permits who meet financial qualification rules. Contact a regional HUD office or go to www.hud.gov.
For information on other government loans, contact your state and local housing offices (which you can locate at http://statelocalgov.net).
For more information on researching, choosing, and qualifying for an affordable mortgage, see Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, Alayna Schroeder, and Marcia Stewart (Nolo).