When to Find a Lender

It is often a good idea to start this process when you start thinking about buying a home. While you can't actually apply for a mortgage until you've chosen your specific home and signed a purchase agreement, you should start talking to lenders. This way you’ll have a better understanding of what you can qualify for and afford and you will also have a good relationship with a lender when it comes time to actually apply for the mortgage.

How to Find a Lender

Often the only factor people consider when choosing a mortgage lender is finding the lowest interest rate. Of course, financial considerations are critical and you certainly should consider the different rates lenders offer on comparable loans. But you also want a lender you can trust, and someone you can work with effectively. Here are some suggested steps to find a mortgage lender:

1. Develop a list. Get referrals from family and friends who have bought or refinanced a home recently, review the newspaper's real estate or business section, or just consult your local phone book under "Mortgages."
2. Talk to lenders. Call or visit the lenders on your list. This will give you an initial feel for what it will be like to work with them.
3. Compare rates for similar loans. Among the things you'll want to discuss with prospective lenders are the rates they offer on mortgages. But when comparing rates between lenders, be sure the rates are for comparable loans -- and remember to include fees and other costs.

Get Acquainted with Types of Financing

The first thing to do is find out what the current rates are. You can get this information from your newspaper or your real estate agent. When comparing rates, you need to look at the annual percentage rate (APR), which includes interest, extra fees and costs amortized over the life of the loan.

You should become familiar with the various types of loans available; fixed rate, adjustable rate, government-backed loans (FHA and VA), assumptions, blended loans, and more. FHA loans, for example, allow first time buyers to put 5% or less down.

Check how rates are calculated (fixed versus variable), and whether charges are fully amortized over the life of the loan, or whether you'll have to pay points up front and/or balloon payments at the end. Is there a prepayment penalty clause?

Finding the Right Kind of Mortgage

Which loans are best for you depends on such factors as:

• Your current financial picture;
• Potential changes in your finances;
• What your length of stay in the home will be; and
• Your comfort level with having your mortgage payment change from time to time.

For example, if you only plan to reside in the home for a year or two, starting with a lower Adjustable Rate Mortgage (ARM) might be the best choice. If you have no plans to move, and feel that inflation will rise rapidly, a fixed rate would obviously be better.

The best way to find the "right" answer is to discuss your finances, your future plans and financial prospects, and your preferences frankly with a mortgage lender.