Finding the best possible interest rate for your mortgage loan is absolutely critical. It should go without saying that comparison shopping is a must -- thousands and thousands of dollars are at stake!
But before you start calling all the mortgage lenders in your area and requesting rate quotes, consider following this game plan to get the terms that best fulfill your individual needs.
Up-front preparations will enable the lender to give you a precise quote based on the specific mortgage you need. That's key to getting the best interest rate possible.
The first step is to figure out what you want and to understand your finances. This is critical because the interest rate depends heavily on the structure and size of your loan.
- Know what you want: How long do you anticipate you'll live in the house? Do you want a traditional 30-year loan, or a shorter 15-year loan? Are you interested in a traditional mortgage, or perhaps utilizing a government-supported program like an FHA loan?
Traditional loans, whether 15-year or 30-year, typically require a 20% down payment. A 15-year loan will generally have a lower interest rate than a 30-year loan, but the monthly payment will be considerably higher because you are paying off the debt in half the number of payments. There are a huge array of government programs available to help first-time home buyers, veterans, and even those with low credit scores secure funding to buy their own home.
- Know your finances: How much are you planning to pay for your house? How big will your down payment be? Are you willing to pay points for a lower interest rate? What is your credit like? (Have you checked your free credit report at AnnualCreditReport.com?)
Knowing your finances prepares you to talk in detail with the mortgage lender about your situation. It can be helpful to print off your bank statements, tax returns or W-2 form, and even your budget to bring to the meeting. This will speed up the process tremendously and make a great impression with the bank. If the bank does require any additional information -- every bank is different, so plan on filling out some additional forms or digging up old financial records -- doing this prep work ahead of time will minimize any extra work you have to do.
The terms you choose will have a dramatic impact on the interest rate quotes you receive. For example, a shorter loan term and a larger down payment can both lower your rate. Discount points can save you thousands, but only if you live in the house for a long enough period of time. The lender will want to pull your credit report to give you the most accurate quote possible. Put your best foot forward by ensuring that report is accurate before you even start the conversation.
Be a smart comparison-shopper
With the prep work complete, it's time to comparison shop. As you navigate this part of the process, remember that communication and organization are key.
- Get familiar with the current mortgage landscape: Go online and use rate comparison tools to quickly assess non-traditional and national lending options so you know what to expect as you set up appointments with banks, credit unions, and other lenders, or shop online for a mortgage.
- Consistently communicate what you want: It's important to consistently communicate the specifics of what you want to each and every lender. Consider typing up and printing copies of the prep work you did above and then giving that sheet to each lender.
- Ensure all of the various lenders are using the same assumptions: If one lender gives you a quote for a 15-year loan and another a quote for a 30-year loan, the two rate quotes won't be fair comparisons. The 15-year quote will be lower every time.
- Make sure you're comparing apples to apples: Communication is a two-way street, and that means you must also be careful to listen and record what each bank tells you. Again, it's a smart idea to write down all the details from each lender in a consistent format. You'll want to know the rate quote, the term of the loan, discount point options, fees, prepayment penalties, mortgage insurance requirements, and down payment options.
As a smart and organized shopper, you'll enjoy years of savings thanks to your hard work and smart comparison-shopping.