Home Loan Comparisons - How to Compare Loans

by Brandon Cornett, publisher of Home Buying Institute

So, you've done all of your financial homework and decided you are ready to buy a home. Now you're shopping for the best interest rates and comparing the home loans offered by different lenders. But what should you be looking at during this comparison process? How do you compare one home loan offer to another, and what are the most important things to consider?

These are common questions among first-time home buyers, so we have answered them in detail below. Here are some things to keep in mind when making home loan comparisons between different lenders.

Things to Compare When Choosing a Home Loan

Affordability is the most important thing. Can you afford the monthly payments on the loan, or will you be scraping by each month to make the payments? You need to establish a budget for yourself and buy within your means. Otherwise, you could become another foreclosure statistic.

With that disclaimer out of the way, let's talk about home loan comparisons and what you need to compare along the way...

• Monthly payment -- This is the most important factor for you, because it determines the affordability of the loan. Everything else listed below (the rate, the term, etc.) adds up to this all-important factor. How much will the home loan cost you each month? And can you afford that monthly payment? Remember, it's possible to get approved for a loan that's simply too big for you. So stay within your budget!
• Interest rate -- You should also compare home loan interest rates. Lenders will assign a rate to your loan based on several factors. Your credit score is chief among them. A good score will help you secure a lower rate on the loan. Additionally, the interest rate is a component of the monthly payment, so it has the power to make or break the loan in terms of affordability.
• Term -- The length of the loan is known as the term. This will affect the size of your monthly payments. If you take a fixed amount and expand it over time, the payment size will decrease. If you shorten the term, the payments will go up. The most common length for mortgage loans is 30 years.
• Fixed vs. adjustable -- This is another key point of comparison for home loans, and it's where a lot of first-time buyers go astray. I recommend fixed-rate mortgages in almost every scenario. The only time I would recommend an adjustable (ARM) loan is when the buyers only plan to be in the house for a few years.
• Points -- You may encounter a situation where a lender offers a certain interest rate, but only if you pay one or more points at closing. A point equals one percent of the loan amount. This is a tradeoff situation -- it's the difference between paying more money up front versus paying more over the long term. You can lower the interest rate by paying points at closing, but you need to compare the pros and cons of both scenarios.

Those are some of the key things to consider during your home loan comparisons and research. Here are some articles to help you learn more about these important topics, and to compare them accordingly.

Monthly Payments
How much house can I afford to buy?
How much house can I get with my income?

Interest Rates
What borrowers should know about loan rates
How to find the best mortgage rates online

Fixed vs. Adjustable
Types of home loans
Adjustable-rate mortgages (ARM)
Fixed-rate mortgage loans

Paying Points
What are points and when should I buy one?
How do mortgage points work?

So there you have them, the primary points of comparison you should consider when shopping for a mortgage. If you understand all of the concepts listed above, and you compare home loans with these things in mind, you'll be much better off in the long run.

These are big decisions that require plenty of research and forethought. If you want to learn more about mortgages and home buying, you can do so by using the main menu at the top of this website. If you have a question about loan comparisons or a similar topic, you can ask it here.

Mortgage Process  >>  Comparing Loans