Even though mortgage rates have climbed from the record lows seen a little over a year ago, they are still low on a historical basis.
However, that doesn't mean home buyers should simply accept the first mortgage rate that is offered. Even a small difference in rates could mean saving big bucks down the road. For example, the difference between a 4% and a 4.1% rate on a 30-year, $300,000 mortgage is more than $6,200. With a little effort, you could end up with the best mortgage rates available to you.
1. Know where you stand
Before you even start shopping for a mortgage, it's best to know exactly how your credit looks and what that means in terms of mortgage rates.
One useful website is myFICO.com, which provides subscribers with their FICO credit score, the same score most lenders consider. Members also have access to the current average mortgage rates for consumers with their score. The company's Score Watch product does cost $14.95 per month, but it could be well worth paying for while you have use for it. You'll also get a "score simulator" that can tell you the impact of certain changes in your score, like paying down your credit cards or opening a new account.
For example, it tells me that if my FICO score is 730, I should be able to obtain a 30-year mortgage with a 4.038% interest rate. This is useful information, as it gives you a starting point for mortgage shopping.
2. Shop around
The biggest mistake many mortgage shoppers make is simply using a lender recommended by their real estate agent and accepting the first mortgage offer.
Investigate all of your options. Get mortgage quotes from national banks, regional banks, local banks, credit unions, and direct lenders. Just be sure to do so within a 14-day window so that these checks will only count as one inquiry on your credit. When you ask a lender for a pre-approval, they will run your credit. A "hard inquiry" shows up on your credit and can adversely affect your score by a few points. However, so long as you make all of your applications within those 14 days, these inquiries will only show up as a single inquiry for scoring purposes.
3. Opt for a shorter lock period
One way to squeeze a little bit more out of your mortgage deal is to accept a shorter rate lock.
Most lenders offer various periods of time during which your interest rate can be "locked in," with the options generally ranging from 30 to 90 days. Basically, this allows you to close on your mortgage in the future while guaranteeing you today's interest rates. This can be handy when interest rates are rising or when rates fall suddenly and you want to take advantage.
However, a longer rate lock can cost significantly more either in terms of the rate itself or in higher "points." According to one Bank of America mortgage agent, choosing a 60-day lock over a 30-day lock can cost an additional point, or 1% of the loan amount.
The best course here is to wait to lock in your rate until you've already agreed to purchase a home and then choose the shortest closing period you can reasonably accommodate.
4. Don't forget about fees and points
The "best" mortgage rates don't always have the lowest advertised rates. You need to consider the fees and points you'll pay in order to determine whether you're getting the best deal.
For instance, after running a quick search on Zillow for mortgage rates in my area, I see that the top three loans offered near me all come with a 4% interest rate with no points. However, the lender fees range from $347 to $1,162. Factoring this into the cost of the loan produces the annual percentage rate, or APR, which is the best representation of the true amount you're paying to borrow money.
So, even though these loans have the same interest rate, the APR varies from 4.012% to 4.040%. And, as we know, that little difference adds up over the life of the loan.
5. Make a larger down payment
Another way to obtain the best mortgage rates is to pay more of the purchase price up front.
A larger down payment means lower risk in the eyes of a lender. It basically lets them know that you're more likely to pay your bills on time, as you're putting more of your own money at risk. For example, changing the down payment on my Zillow search from 20% to 40% lowers the best APR offer from 4.012% to 4.003%.
Again, while that's not a big difference, it will add up in the long run. Remember that a higher down payment means you're borrowing less money to begin with -- which also means lower payments.
These small discounts are worth the effort
None of these tips by themselves will make a large difference in your mortgage rate, but if you shop around and combine all of these tactics, you can realize serious savings. If you ask me, saving thousands of dollars is well worth the effort to find the best mortgage rates.
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