Mortgage rates were relatively unchanged after the Federal Reserve raised key interest rates earlier this week.

But even when rates do rise, you are never a total slave to what the Fed does or doesn't do.

"The wide range of rates and loans available from different sources means that only a modicum of shopping can more than neutralize any overall market change," said Jack Guttentag, the Mortgage Professor.

To keep inflation in check, the Federal Reserve raised rates on federal funds used for overnight loans between banks from 5.25 percent to 5.5 percent. Likely it's last move this year, the Fed also increased the discount rate on direct loans the Federal Reserve makes to banks from 4.75 percent to 5.0 percent.

"What the Fed did today wasn't unexpected and the markets more concerned about the tight jobs market and oil prices hitting a nine-year high. So the rate hike is not so much a factor. The other concerns were pushing up rates only a small amount today compared to prior Fed action," said Earl Peattie, president of Morro Bay-CA based Mortgage News Co.

To make sure economic twitches and turns don't cut into your bottom line when you are shopping for a mortgage, examine your options.

Put more money down

"Those who can afford to do so should consider making larger down payments," said Eric Tyson co-author of "Mortgages for Dummies" (IDG Books, $16.99).

"Unless you're willing to be an aggressive investor with your excess cash and you buy and hold good investments, you're unlikely to earn a high enough return from your investments after-tax to exceed the after-tax cost of mortgage money," he added.

Lock it in

A rate lock can fasten down mortgages.

A rate lock guarantees you the rate you lock in and, at additional cost, it can float you down to an even lower rate should rates fall during your lock-in period. Falling mortgage rates were down to 7.67 percent last week, on 30-year fixed rate conforming loans, according to Freddie Mac.

Get the lock in writing for a duration long enough to get you through escrow. You don't want it to expire before escrow closes, particularly if rates are then on their way up.

Lock in as many of the costs as you can -- the points as well as the rate.

Set the lock "on application" rather than "on approval," otherwise you won't get a stab at rates until the loan application is approved. Rates are flat and stable now, but approval could be weeks away and anything can happen by then.

Shop around for both the terms of the lock contract and its cost. Some lenders may charge you an up-front, non-refundable fee should you withdraw your application, if your credit is denied, or if for some other reason you don't close the loan. Others might charge the fee at settlement. The fee might be a flat fee, a percentage of the mortgage amount, a fraction of a percentage point or a higher interest rate. Some lenders offer the service at no cost.

Comparison shop for loans

Internet-based mortgage brokers have generated a windfall of mortgage discounts from a quarter to a half percentage point by automating the loan process and cutting out the traditional cost of the middleman.

Don't limit shopping around to Web surfing, however. Examine rates from several individual lenders' loans and and use a broker or two to sift through hundreds of loans from dozens of lenders.

"Brokers generally offered us the best deals, and were better informed and more attentive than bankers. Brokers only make money if they strike a deal for you, while bankers get paid whether you close, or not," said Elizaville, NY-based Marc Eisenson, co-author, along with Nancy Castleman and Gerri Detweiler of "Slash Your Debt" (Good Advice Press, $10.95).

Also don't forget to compare points, charged in addition to the interest rate as a cost to borrow money. Each point is one percent of the loan.

"In exchange for paying no points up-front you assume a slightly higher interest rate. Your monthly payments will be a little higher, but you just saved literally thousands of dollars of up-front points," said Forrest Cambell, president of the Silicon Valley (CA) Chapter of the California Association of Mortgage Brokers.

Shop for cheaper terms

Last week, Fannie Mae reported the average fixed-rate on a 15-year mortgage had slipped to 7.30, compared to 7.67 percent for a 30-year mortgage.

Short term loans' monthly costs are higher than longer term loans, but they can save you hundreds of thousands of dollars over the shorter term.

For example, a 15-year conforming ($240,000) loan at Fannie Mae's average rate last week costs $2,197.65 a month in principal and interest, compared to only $1,706.15 for the 30-year loan.

However, the 30-year loan term will sock you for $614,200.72 in 30 years, compared to only $395,573.95 over the life of a 15-year loan.

Consider adjustable rates

Conversely, a 30-year adjustable rate loan gives you a cheaper monthly rate than the 30-year fixed. Last week, Fannie Mae's 1-year Treasury-indexed ARM averaged 6.30 percent.

Using Fannie Mae's averages on a $240,000 conforming loan, the ARM will cost you only $1,485.54 a month compared to $1,706.15 for the fixed.

The less your total monthly financial obligations, the more the lender will lend you and that could mean a larger, newer or otherwise more expensive home than you could get with a fixed rate and its higher monthly payments.

Don't forget, however, ARMs are only initially lower and adjustments are likely to move the rate upward more in line with the fixed rate.

Be aware of the ARM's adjustment limits or "caps" -- how high the rate can rise during each adjustment period (often every six months to a year) as well as over the life of the loan.

If the ARM costs adjust beyond your means you can refinance to a fixed rate loan. If you plan to move before the ARM's adjustments catch it up to fixed rates, you may have less concern about caps and adjustment periods.

"There are also intermediate ARM loans, loans that are fixed for a period of time, three, five, seven, 10 years and then turn into adjustables. These loans are almost always lower by a 1/4 to 1/2 percent than conventional 30 year fixed rate loans," said Cambell.

Look at automatic refinance loans

A growing number of lenders are also offering special mortgages that act like an ARM in reverse.

Called "automatic refinance mortgages" or "reverse-rate mortgages," the loans come with a guarantee that your interest rate will drop by as much as 1.5 percentage points below your starting rate -- even if market rates are higher at the time.

Designed primarily to give less creditworthy borrowers a chance to prove they can make mortgage payments on time and over time, the loan comes with annual interest rate decreases spread out over a couple of years. You must make all payments on time, maintain a good credit standing and not fall below the income level you listed on your loan application.

Just as an ARM is a cheaper rate than a fixed rate, reverse-rate mortgages start off with a higher rate.

"If we have a product where the initial rate is the cap rate, and if rates can only decline, then consumers will plainly want to consider this loan option," said "Our Broker" Peter Miller, author of "The Common Sense Mortgage" (Contemporary Books, $16.95).

For more interest rate news, check out the Realty Times Interest Rate Watch

Published: November 19, 1999

Use of this article without permission is a violation of federal copyright laws.

A journalist for 35-years, Broderick Perkins parlayed an old-school daily newspaper career into a digital news service offering editorial content and consulting services. Perkins' San Jose, CA-based DeadlineNews Group includes the flagship news site, DeadlineNews.Com, offering real estate, personal finance and consumer journalism, and a backshop, the Deadline Newsroom.