When shopping for a mortgage, while the interest rate is important, don't judge the financing by the interest rate alone. Compare several items in the loan package, including:
- Points and junk fees. A "point" or "discount point" is one percent of the loan amount. On a low-interest-rate loan, points can be double those for a loan with a higher interest rate, causing you to pay more up front at closing. Also, some lenders are fond of charging "junk fees" at closing, which enable them to make up for a lower interest rate.
- Total fees charged by the lender. Some lenders will absorb the cost of many services, while other do not, so ask in advance.
- Term. In general, the longer the life of the loan and the more fixed the payment, the more you can expect to pay in interest. For example, with a 30-year fixed-rate loan you will pay interest equivalent to what you originally borrowed by the 15th year, at current rates. You may wish to consider 15 or 20-year fixed rate loans as well.
- Penalties. Ask what penalties will be charged if you pay off the note early. You may wish to refinance the loan at a more attractive rate at a later time. An existing prepayment clause could require you to pay a penalty if you pay off the loan early.
