Amid all the bad news about mortgage defaults and foreclosures, there's good news for qualified borrowers. Thanks to the Federal Reserve, you can lock in rates lower than 5% if you're buying a home or refinancing a loan.

The average interest rate on a 30-year, fixed-rate mortgage has fallen to 5%. You could pay as little as 4.75% on a 15-year loan.

By now, everyone knows the importance of due diligence before agreeing to a mortgage. This time around, lenders are scrutinizing applicants' incomes, credit scores and home values more closely.

Buyers with a 20% down payment and good credit will get the lowest rates. There are loans that allow smaller down payments if you know where to search and which lenders to trust. These four steps will put you on the right track.

Step 1: Figure out the type of mortgage that's best for you

Stick to 30-year fixed-rate mortgages, even though interest rates will be higher than those of adjustable-rate mortgages.

Adjustable-rate mortgages are tempting if you plan to move within a few years. But your rate could increase as inflation grows, which is more likely now that the Fed is printing money to boost the economy.

A 15-year mortgage comes with lower rates, and higher monthly payments that will save you a fortune in interest if you plan to stay in your home. But if you want flexibility, you can get the same advantage by making extra principal payments on a 30-year loan.

Step 2: Understand fees and costs

While most people focus on a loan's interest rate, the true cost includes any related fees. When comparing deals, make sure you're comparing all the costs.

Brokers who offer loans without closing costs are usually rolling those fees for appraisals, title search and legal fees into the interest rate they're offering. A 5.25% loan without closing costs might not be as good a choice as a mortgage with a lower rate and modest closing costs. Each lender should give you a "good faith" estimate of all costs.

In today's volatile market, it's probably not wise to buy "points" to reduce your rate. Usually, each point equals 1% of the loan amount, so each point of on a $100,000 loan costs $1,000. While points can be tax deductible, they amount to wasted money if you refinance at a lower rate later.

Interest.com offers calculators that estimate the amount you can afford to borrow and the amount of time you would need to hold the loan to break even with points.

Step 3: Start your search

Radio advertisements are back, promising easy deals and low rates without closing costs. How will you know you're getting a good deal?

Online tools make comparison shopping simple. Some of these sites are run by mortgage companies, which use them to find leads. You might have to give some personal information to get a quote, but don't give your Social Security number until you're ready to lock in.

GuaranteedRate.com, for example, helps users compare deals and contact brokers. If you find a better deal on a fixed-rate loan elsewhere, the company will pay you $500.

Be sure to get quotes from local banks and credit unions, which usually offer members competitive rates.

Step 4: Get it in writing

Lenders should be able to make firm rate commitments that are good for at least 30 days. If you have questions, get answers in writing. And if you're refinancing, check your original loan documents to make sure you won't be penalized for paying your loan early. When in doubt, consult with an attorney who specializes in real estate law.

If you're considering an adjustable-rate mortgage, ask how high the monthly payment could go and when interest rates might increase.

The American dream is still alive. In fact, it's more affordable than ever if you qualify. And that's The Savage Truth!
Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated. She was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. Savage currently serves as a director of the Chicago Mercantile Exchange Corp.