The first step in negotiating the best mortgage is to call around and compare "rates and points."

"Rates" are the interest rates, and each "point" equals 1% of your loan amount. Paying one point is equal to paying an additional 1/8% on your mortgage interest rate over the life of the mortgage. To compare rates and points, add 1/8% to the quoted rate for each point. For instance, of these three quotes: 1) 6% plus 4 points; 2) 6% with 2 points; and 3) 6-1/4% with no points, which is best?

Let's see: 6% plus 4/8% (remember, add 1/8% for each point) equals 6-1/2%; 6% plus 2/8% equals 6-1/4%; and the last rate was 6-1/4%. So both the second and the third lender are offering the same great mortgage rate. Or are they?

Finding the best lender for you depends on how long you plan on staying in your house. If you'll be paying the loan off over the full 30-year term, then it's cheaper for you to go with the package that has the points. Your best rate for the life of the loan would be 6-1/4%.
But if you'll be moving to another house before the loan is fully paid off, say in five years or so, you'll save money by taking the "no-pointer" package. On a $100,000 mortgage, two points would equal $2,000. Remember, the interest rate is 6% regardless of whether or not you pay points. So pocket the $2,000 instead of paying the points!

If you decide to take the package with points, be sure to pay for your points with a separate check. That way, the money is considered a payment of interest, not a service fee. Interest is deductible - service fees are not.

Smart Money Move: If you don't want to pay your points up front, work out a deal with the seller of the home. If you agreed to buy the home for $140,000, ask the seller to bump the sale price to $143,000. Then have it written into the contract that the seller will pay the points with the extra $3,000. The seller still gets paid his money, and you get to roll the points into your mortgage and pay them over the life of the loan.

Straight Talk Tip: If you want a quick way to shop for a mortgage, visit HSH Associates online. For $20, they'll send you a "Homebuyers Kit" that includes a list of area lenders and their best mortgage deals.

No-Nonsense Way to "Lock In" the Best Mortgage Deal

After you identify the best net interest rate (weighing points and the rate), talk turkey with the best lenders.
ASK these three questions (and get the answers in writing!):

1. What is my interest rate and how long will you guarantee or "lock in" that rate from the date of mortgage approval? We recommend getting a 45- to 60-day lock-in period in case there's a delay in processing your application.

2. If interest rates fall during my lock-in period, will you give me the lower rate? The answer you want to hear is "Absolutely!"

3. How long will it take to complete the entire application process? Your application should be processed at least 10 business days before your scheduled closing.

Once you've followed these steps and have your mortgage lined up, be sure to read our five-step process for finding the house you've always wanted.