Finding the best mortgage rate may not be as easy as simply identifying the lowest interest rate (30 year mortgage rates) available.   The criteria a mortgage shopper should apply must begin with the question of how long they plan to hold onto the mortgage and retain ownership of the property.  There is no reason to consider the option of paying points and fees to buy down the interest rate when a borrower does not plan to own the property long enough to re-coup (or at least break even) on the closing costs.  The second criteria that should be used in determining whether to buy the interest rate down by paying point and fees, is whether a borrower is refinancing (refinance mortgage rates) or purchasing the property in question.  When refinancing, points and fees have a different tax treatment than if the transaction involves a purchase.  Deducting points and fees typically has a more favorable tax treatment in a purchase transaction rather than in refinancing when the deduction of points is normally amortized over the life of the loan and not deducted in the year they are paid as is typically the case in a purchase.

Another criteria frequently used to determine the best mortgage rate is APR or the Annual Percentage Rate.  The purpose of the APR is to give the mortgage consumer a basis of comparing several loans by examining the total cost of the loan, including some specific costs, over a period of time by reflecting some of those costs in the interest rate (30 year mortgage rates).  The problem with the APR is that it is not required to be calculated the same way across the board, for instance one area were lenders can differ dramatically when it comes to quoting APR, is the number of days of pro-rated interest they use when arriving at their APR calculation.  Pro-rated interest is the number of days remaining within a month that you will pay interest after your new loan closes, for example if your loan should close on the 15th of the month then you would have 15 days (or 16 if the month has 31 days) interest remaining to pay on the new loan.  The problem with lenders including the pro-rated interest in the APR is that there is no uniform requirement for how it is quoted.  Some lenders use 15 days in their calculation and some may use 30 days, a few may even use zero days of pro-rated interest in their APR calculation so it will appear (somewhat deceptively) to be the lowest among their competitors.

What type of loan would be best mortgage for you?  With so many sub-prime borrowers having been burned recently by adjustable rate mortgages, ARMs are being avoided like the plague in this new post-mortgage meltdown era.  It’s unfortunate that all adjustable loans are being written off by many consumers and are now being presented in the same negative light.  In fact, given the right circumstances, an adjustable loan can be a wonderful tool for managing one’s personal cash flow if a borrower is both responsible and educated in maintaining their own finances. Risk tolerance, along with personal confidence and skill, in controlling one’s finances is critical in determining whether an ARM might be right for a particular borrower.  ARMs can also be useful for borrowers who have a short term ownership horizon, perhaps of less than 3-5 years.  Of course given the soft real estate market currently experienced throughout the country, buying a home with such a short term time horizon would likely be a foolish strategy.  Fixed rate mortgages (30 year mortgage rates) are always a safe bet and in many cases borrowers are better off taking a 30 year term versus the shorter 15 year term.  Borrowers opting for the 30 year can always make additional payments to shorten the term of the loan (assuming they take a recommended no prepayment penalty loan), this way they remain in control of managing their mortgage payment and cash flow.  A 15 year mortgage can be a terrific, less costly option for the more mature borrower who does not have as many competing demands for their cash (i.e. saving for retirement, kid’s college education, etc.).

As you have now seen, determining what the best mortgage rate for you may be is not as simple as it sounds.  There are many considerations to take into account and the key to making accurate loan comparisons is to be certain you are truly comparing loans on an apples-to-apples basis and not looking at two loans that have completely different rate and yield equivalencies.

Below are the definitions of some terms that you often hear in the mortgage/lending industry.  Understanding mortgage terminology can be of great assistance in selling a home, commercial property or investment property.  So you will be better prepared for the mortgage/lending process, we have assembled a glossary of terms that are commonly used in the industry.  For more information:

Adjustable-rate mortgage (ARM)
A mortgage with an interest rate and monthly payment that change periodically over the life of the loan based on changes in a specified index.

Callable debt
A debt security whose issuer has the right to redeem the security at a specified price on or after a specified date, but prior to its stated final maturity.

Charge-off
The portion of principal and interest due on a loan that is written off when deemed uncollectible.

Common stock
A security that represents ownership in a company but gives no legal claim to a definite dividend or to a return of capital.

Conventional mortgage
A mortgage loan that is not insured or guaranteed by the federal government.

Credit enhancement
A method to reduce credit risk by requiring collateral, letters of credit, mortgage insurance, corporate guarantees, or other agreements to provide an entity with some assurance that it will be recompensed to some degree in the event of a financial loss.

Credit loss ratio
The ratio of credit-related losses to the dollar amount of Mortgage Backed Securities outstanding and total mortgages owned by the corporation.

Credit-related expenses
The sum of foreclosed property expenses plus the provision for losses.

Credit-related losses
The sum of foreclosed property expenses plus charge-offs.

Credit scoring
A process that uses recorded information about individuals and their loan requests to assess – in a quantifiable, objective, and consistent manner – their future performance regarding debt repayment.

Debt security
A security in which the issuing company generally agrees to repay the principal (typically, the original amount borrowed) and make interest payments according to an agreed-upon schedule.

Default
The failure of a borrower to comply with the terms of a note or the provisions of a mortgage.

Delinquency
A mortgage loan on which a payment has not been made by the due date.

Derivative
A financial instrument that derives its value from an underlying security or notional amount.

Duration
The weighted-average life of the present value of all future cash flows, both principal and interest, of a security.  It is used as a measure of the sensitivity of a security’s value to changes in interest rates.

Earnings per share (EPS)
The net earnings of a corporation divided by the average number of shares of its common stock outstanding during a period.  A common method of expressing a corporation’s profitability.

Fixed-rate mortgage
A mortgage loan in which the interest rate does not change during the entire term of the loan.

Forbearance
The lender’s postponement of legal action when a borrower is delinquent.  It is usually granted when a borrower makes satisfactory arrangements to bring the overdue mortgage payments up to date.

Foreclosure
The legal process by which property that is mortgaged as security for a loan may be sold to pay a defaulting borrower’s loan.

Global Debt Facility
A debt issuance facility through which U.S. dollar and foreign currency debt securities may be offered to investors worldwide with the feature of clearing and settlement through a variety of clearing systems.

Guaranty fee
Compensation paid by a lender to Fannie Mae for the guarantee of timely payments of principal and interest to MBS security holders.

Interest rate swap
A transaction between two parties in which each agrees to exchange payments tied to different interest rates or indicated for a specified period of time, generally based on a notional principal amount.

Intermediate-term mortgage
A mortgage loan with a contractual maturity at time of purchase equal to or less than 20 years.

Lender option commitments
An agreement giving a lender the option to deliver loans or securities by a certain date at agreed-upon terms.

Loan servicing
The tasks a lender performs to protect a mortgage investment, including collecting monthly payments from borrowers and dealing with delinquencies.

Loan-to-value (LTV) ratio
The relationship between the dollar amount of a borrower’s mortgage loan and the value of the property.

Loss mitigation
Activities designed to reduce either the likelihood of the corporation suffering financial losses on a loan or the final dollar value of those losses in the event of a borrower default.

Mandatory delivery commitment
An agreement that a lender will deliver loans or securities by a certain date at agreed-upon terms.

Medium-term notes
Unsecured general obligations of Fannie Mae with maturities of one day or more and with principal and interest payable in U.S. dollars.

Modification
Any change to the original terms of a mortgage.

Mortgage
A legal document that pledges property to a lender as security for the repayment of the loan.  The term also is used to refer to the loan itself.

Mortgage-Backed Security (MBS)
A Fannie Mae security that represents an undivided interest in a group of mortgages.  Principal and interest payments from the individual mortgage loans are grouped and paid out to the MBS holders.

Multifamily housing
A building with more than four residential rental units.

Nonperforming asset
An asset such as a mortgage that is not currently accruing interest or on which interest is not being paid.

Notional principal amount
The hypothetical amount on which interest rate swap payments are based.  The notional principal amount in an interest rate swap generally is not paid or received by either party.

Preferred stock
Stock that takes priority over common stock with regard to dividends and liquidation rights.  Preferred stockholders typically have no voting rights.

Pre-foreclosure sale
A procedure in which the borrower is allowed to sell his or her property for an amount less than what is owed on it to avoid a foreclosure.  This sale fully satisfies the borrower’s debt.

Real Estate Mortgage Investment Conduit (REMIC)
A security that represents a beneficial interest in a trust having multiple classes of securities.  The securities of each class entitle investors to cash flows structured differently from the payments on the underlying mortgages.

Repayment plan
An agreement between a lender and a borrower who is delinquent on his or her mortgage payments in which the borrower agrees to make additional payments to pay down past due amounts while still making regularly scheduled payments.

Return on average common equity
Net income available to common stockholders, as a percentage of average common stockholders’ equity.

Reverse mortgage
A financial tool that provides seniors with funds from the equity in their homes.  Generally no payments are made on a reverse mortgage until the borrower moves or the property is sold.  The final repayment obligation is designed to not exceed the proceeds from the sale of the home.

Risk-based capital
The amount of capital necessary to absorb losses throughout a hypothetical ten-year period marked by severely adverse circumstances.

Secondary mortgage market
The market in which residential mortgages or mortgage securities are bought and sold.

Security
A financial instrument showing ownership of equity (such as common stock), indebtedness (such as a debt security), a group of mortgages (such as MBS), or potential ownership (such as an option).

Serious delinquency
A single-family mortgage that is 90 days or more past due, or a multifamily mortgage that is two months or more past due.

Stockholders’ equity
The sum of proceeds from the issuance of stock and retained earnings less amounts paid to repurchase common shares.

Stripped Mortgage Backed Securities (SMBS)
Securities created by “stripping” or separating the principal and interest payments from the underlying pool of mortgages into two classes of securities, with each receiving a different proportion of the principal and interest payments.

Transfer agent
A bank or trust company charged with keeping a record of a company’s stockholders and canceling and issuing certificates as shares are bought and sold.

Underwriting
The process of evaluating a loan application to determine the risk involved for the lender.  It involves an analysis of the borrower’s ability and willingness to repay the debt and the value of the property.