A good way to compare rates is to look at a loan's annual percentage rate (APR). The APR takes into account not just the interest rate but also any points, broker fees and other charges you may be required to pay.


POINTS
Points are fees paid to the lender or broker which are usually linked to the interest rate; typically, the more points you pay, the lower the rate.

1 "point" is equal to 1 percent of the loan amount; so if you are borrowing $200,000, then 1 point equals $2,000.

Here's where you can benefit... It may be worth paying $2,000 (or more) in points to lower your interest rate over a 15- or 30-year period. Lower interest rates lead to lower payments!

TIP: Consider how long you expect to live in your new home before paying extra points to lower your interest rate. Paying 1 extra point may save you $50 a month, but could take as long as three or four years to recoup the price you paid for that point.

FEES
A home loan often involves many fees like loan origination or underwriting fees, broker fees, 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 so be sure to ask.


DOWN PAYMENT
& PRIVATE MORTGAGE INSURANCE (PMI)
Some lenders still require 20 percent of the home's value as a down payment, however, many lenders today offer loans requiring far less - some as little as 5 percent on a conventional loan.

If a 20 percent down payment is not made, lenders usually require the home buyer to purchase Private Mortgage Insurance (PMI) in case the home buyer fails to make their payments.

TIP: Make sure to ask your lender to remove the PMI from your payment once you've paid-in 20% of the loan amount.

Satisfied with the Offer?
Then Lock It In.

Once you are satisfied with the terms you have negotiated, you may want to obtain a written "lock-in" from the lender or broker. The lock-in should include the rate that you've 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 but may be refundable at closing.

A lock-in protects you from rate increases, however if rates fall, you could end up with a less favorable rate. Should that happen, try to negotiate a compromise with the lender or broker.


Terms You Need to Understand when Buying a House:

Adjustable-rate Loans (Variable-rate Loans): these loans typically offer lower initial interest rates than fixed-rate loans. Variable rates fluctuate over the life of the loan based on market conditions. When interest rates rise, generally so do your loan payments; and when interest rates fall, your monthly payments may be lowered. (Maximum and minimum rates are usually a part of this type of agreement.)

Fixed-rate Loans: these loans generally have repayment terms of 15, 20 or 30 years. Both the interest rate and the monthly payments (for principal and interest) stay the same for the life of the loan.

Conventional Loans: mortgage loans other than those insured or guaranteed by a government agency such as the FHA (Federal Housing Administration) or the VA (Veterans Administration).

Interest Rate: the cost of borrowing money expressed as a percentage rate. Interest rates can change because of market conditions.

Annual Percentage Rate (APR): the cost of credit expressed as a yearly rate. The APR includes the interest rate, points, broker fees and certain other credit charges that the borrower is required to pay.

Lock-in: a written agreement guaranteeing a home buyer a specific interest rate on a home loan provided that the loan is closed within a certain period of time, such as 60 or 90 days. Often the agreement also specifies the number of points to be paid at closing.

Loan Origination Fees: fees charged by the lender for processing the loan (these fees are often a certain percentage of the loan amount.)

Points: fees paid to the lender, often to lower the interest rate. (1 point equals 1 percent of the loan amount.) Points are usually paid in cash at closing; however in some cases, the money needed to pay points may be borrowed, but doing so will increase the loan amount.

Private Mortgage Insurance (PMI): insurance which protects the lender against a loss if a borrower defaults on the loan. PMI is usually required for loans in which the down payment is less than 20 percent of the home's appraised value.

Escrow Account: an account held by the lender into which a homeowner pays for expenses like property taxes, homeowner's insurance and PMI. Escrow payments are tacked on to your mortgage payment and allow the home buyer to spread out tax and insurance payments by paying 1/12 of the amount each month (rather than all at once). Typically an escrow account is required if your down payment at closing is less than 20 percent of the home's appraised value.

Closing Costs - Fees You'll Probably Encounter:

application fees abstract of title property survey fees attorney fees notary credit report fees

title examination title insurance document preparation recording fees appraisal

Under the Real Estate Settlement Procedures Act, the law requires the borrower to receive 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.