As of this writing, the average rates on new mortgages in the U.S. are 4.19% for a 30-year fixed loan and 3.23% for a 15-year, according to Bankrate.com. While this is still very low on a historical basis, when it comes to mortgages, every little bit your rate goes down could mean big bucks over the life of the loan. Here are some tips on how to get the lowest mortgage rates, and why it matters so much to your finances.
A simple example
Mortgage rates of 4.1% and 4.2% can't be too different, right? Don't be so sure.
The monthly payments do sound similar at $966.40 and $978.03, respectively. However, the difference amounts to almost $4,200 over the life of the loan. So maybe it does pay to find the lowest mortgage rates available to you.
How's your credit?
Most people know that all else being equal, a better credit score means a better mortgage rate. However, many people don't realize just how big of a difference it makes.
According to myFICO.com, whose FICO credit scores are used in the vast majority of lending decisions, the best mortgage rates go to those consumers with scores above 760 (850 is perfect), and the current average rate for a 30-year mortgage is just over 3.8% for this group.
While it is possible to get a mortgage with scores as low as 620, the interest rate you can expect to pay rises rapidly. For those consumers with scores between 620 and 639, the average rate is 5.39%. On a $200,000 loan, this means a $190 higher monthly payment than consumers with excellent credit.
If your credit is less than ideal, it may be a good idea to do some damage control before shopping for a mortgage. There are some relatively quick ways to boost your credit score by a few points.
For instance, 30% of your FICO score is based on the amount of available credit you use. By simply paying down a considerable amount of your outstanding credit card debt, you could possibly jump into the next "tier" of credit scores. Credit inquiries can lower your score, but only the last two years are counted, so not applying for any new credit before applying for a mortgage can bump you up a few points. And, of course, keep paying your bills on time.
To see what difference an improvement of a few points could make for your prospective mortgage, myFICO.com has a calculator that compares payments for a certain mortgage amount for all levels of credit scores.
This really should go without saying, but many people simply walk into a bank and accept the first interest rate they get offered, no questions asked.
At minimum, you should get two or three quotes to compare. A quick search on Zillow's mortgage marketplace shows interest rates ranging by about 0.125% for the same credit score, income, and loan amount. We saw earlier what a difference this could make, so isn't it worth spending a little time searching?
Even among the big banks, there is some variety. Wells Fargo is currently advertising a standard 30-year rate of 4.25%, and Bank of America's current rate is 4.125% as of this writing. While rates fluctuate constantly, and these may be different by the time you're reading this, one thing is fairly certain -- you will always find a variety of rates to choose from by contacting several lenders.
Points or no points?
One way to get your interest rate down is by agreeing to pay "points." That is, you pay a percentage of the loan amount up front in exchange for a lower rate. Is it worth it?
Whether or not paying points is worth the cost depends on how long you plan on staying in the home. For example, consider a $200,000 30-year loan at 4.25% interest with no points and one with 4.125% interest and one point (or $2,000 paid upfront). The monthly payments on the two loans would be $983.88 and $969.30, respectively -- that's a savings of $14.58 per month for the "points" loan.
Well, after 138 payments (about 11 and a half years), the savings from the lower-interest loan would add up to more than the $2,000 you paid to get it. So, if you were planning to hang on to the house for longer than that, it could be worth it to pay points.
It's worth the effort
To sum it up, there are hundreds of lenders out there who will give you hundreds of different mortgage quotes for the exact same home. To get the lowest mortgage rates, you need to optimize your credit score, shop around, and determine whether or not paying points is worth it for your particular situation.
And never, under any circumstances should you accept the first loan offer that comes your way!