Mortgage Basics: Information for First Time Home Buyers

How should I compare mortgage loan packages?

One of the most important factors to look for when shopping for a home mortgage is the annual percentage rate, or APR. The APR includes all the costs of credit, including such items as interest, points (fees often charged when a mortgage is closed), and mortgage insurance (when included in the loan). Lenders must disclose the APR under the Truth in Lending Act. Generally, a lower APR will lower the cost of your loan. Advertisements that state other rates such as simple interest rates, do not include all the costs of the loan. If you shop for a mortgage loan with interest rates or payments that change, be sure to compare:

• initial interest rates
• the cap -- or how much the interest rate can increase/decrease over the life of the loan, and how much the rate can change at each adjustment
• how often the interest rate can change
• how much and how often the monthly payments and term of the loan can change
• what index is used to determine the rate changes
• what margin is used -- or how much additional a lender can add to the adjusted interest rate
• the limits, if any, on negative amortization -- the loss of equity in your home when low monthly payments do not cover fully the interest rate charges agreed upon in the mortgage contract
• any balloon payments – a large payment at the end of your loan term, often after a series of low monthly payments.