The most important step in the home buying process, if you aren’t paying cash, is securing a loan. You’ll need to shop for a lender, compare loan products, and get that all-important loan preapproval letter.

Today we’ll take a look at how to go about choosing a lender.

Myth number 1

The biggest myth among homebuyers is that the lender with the lowest interest rate is the best lender. Here is why this may not be the case:

• The advertised rates may not apply to the loan product you want.
• The actual Annual Percentage Rate (APR) may be higher – a lot higher.
• Bait & Switch is sadly still alive and well in the mortgage industry.

Jumping online or on the telephone to find lenders with the lowest rates, then, isn’t a smart first move. Start with the mortgage department of whichever bank or credit handles your personal banking. Ask about the APR; this figure includes not only the annual percentage rate on the loan but the points and fees as well.

Then, contact a mortgage broker for the same information and compare the two quotes.

What else to look for

When you call or visit lenders, look into the following aspects of their loan products:

• Ask if the rates are the lowest for the day or for the week and if they are for fixed-rate or adjustable-rate loans.
• If you’ll be obtaining an adjustable-rate mortgage, find out when the rates are expected to increase, how the payments will vary, and whether or not you can look forward to a decreased payment if rates go down.
• Ask the banker or broker to put the points into a dollar amount. This makes it easier to figure out just how much you’ll be paying for the loan and to compare it to other loans.
• If the fees are lumped together under one category ask that they be broken down so you can better compare them to other loans.

If you’re going after a conventional loan, ask how much you’ll be required to pay as a down payment and, if private mortgage insurance is required, how much the monthly premium will be.

The lender is required to supply you with a Loan Estimate form within three days of applying for a mortgage. This form itemizes the loan’s terms and fees and, since all lenders use the same form, it is a handy way to compare loans between lenders.