(Updated January 2015)

A home is probably the most expensive purchase you'll ever make. Choosing the right lender can reduce the stress and the cost of your undertaking. Here are four steps that will get you there.

Refer to references

Whether you're searching for a primary or second mortgage, or a mortgage refinancing, you want a reputable company. Poll your friends, family, neighbors and co-workers who have recently bought homes. Ask them about their mortgage companies. Did they have a good experience?

With a short list in hand, start calling the lenders. Local ones, familiar with the market, will be able to give more accurate estimates. Then search online for competitive offers to see if you can get a better deal.

These days, you have a lot of flexibility in choosing a lender. Many lenders are licensed nationwide these days, and don't even require a local office, which broadens your options. (Applications and documentation can be submitted by mail or electronically, and loan closing can be done at the offices of a local title company or attorney).

Local lenders, on the other hand, may be more willing to make loans on unique properties, those that are unlike other homes in their neighborhood and so are difficult to assess (for example, the original farmhouse on land that's been developed as a subdivision). They may also be more flexible in terms of dealing with self-employed borrowers or those with multiple sources of income, or special situations the big lenders don't want to bother with.

While you're at it, check with at least one mortgage broker as well. Brokers don't actually issue mortgages themselves, but act as intermediaries for lenders. Because they work with multiple lenders, they can often find the one who's the best match for you and has the right pricing.

Calculate the costs

Ask each lender about interest rates, points, and a list of fees and costs. Make sure that you ask each potential lender exactly the same questions. This way, when you're done, you'll be comparing apples to apples. Make all the calls within a couple of days to reduce the chance that a change in market conditions is causing differences in the answers.

Mortgage pricing is complicated, which can make it difficult to make an apples-to-apples comparison between loan offers. One mortgage may offer a very low rate, but have closing costs that actually make it more costly overall than a competing offer with a higher rate.

An easy way to compare offers is to look at the APR, or annual percentage rate. It's a way of expressing the total cost of the loan in terms of an interest rate - the higher the rate, the more costly the loan. It's a good rule of thumb, but doesn't automatically tell you what your best deal will be.

With any loan offer, you want to start by asking the lender to quote you a rate with zero discount points and the closing costs billed separately. This will give you the best picture of the true costs of the loan. You can then ask about other options, such as buying discount points, rolling closing costs into the loan amount or charging a higher rate in lieu of some or all closing costs.

Pay attention, do your research

Does the lender or broker seem to know his business? Will she answer all your questions? Are there signs that the operation is disorganized and inefficient? Is the lender or broker available when you call, and are your calls returned promptly? If you're uncomfortable, move on to someone else.

Ask for recent customers and check references. Search for information about a company at the Better Business Bureau.

Negotiate

Once you're sure that you have the right person for the job, negotiate for lower fees and interest rates. The lender's offer may include an "overage"-extra costs added to interest, points or fees-and that money goes into the loan officer's pocket after closing. Ask if anything can be cut or reduced. Then consider locking in the deal so that the mortgage rates can't rise while your loan is being processed.

Following your instincts and getting the information you need will help smooth the home mortgage process.

Published on October 16, 2006