by Matt Frankel, CFP | Updated July 19, 2021 - First published on Aug. 10, 2020
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Don't settle for an average mortgage rate. Find out why here.
The 30-year mortgage rate fell below 3% in July for the first time since Freddie Mac started tracking average rate data in 1971. Though this is significantly lower than the rate has been, it's still important to get the lowest rate you can.
Here's why it's so important to put in the extra effort to get your mortgage rate as low as possible, and some strategies to make sure your borrowing cost is minimal.
Secure access to The Ascent's free guide that reveals how to get the lowest mortgage rate for your new home purchase or when refinancing. Rates are still at multi-decade lows so take action today to avoid missing out.
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A mortgage rate of 3% sounds cheap enough, right?
You'd think so. After all, if you're borrowing $300,000 to buy a home, a 3% interest rate makes your monthly payment nearly $170 lower on a 30-year mortgage than it would be with a 4% interest rate -- and 4% was already historically low.
However, when it comes to mortgage rates, every little bit can make a big difference from a long-term perspective. Let's say you're borrowing $300,000 on a 30-year fixed-rate mortgage. One lender gives you a rate of 3%, and another offers 2.9%. How much of a difference will that make over the term of the loan? Maybe a few hundred dollars? A thousand dollars?
In fact, that seemingly small difference translates to nearly $5,800 in interest over the 30-year term. That's why simply accepting the average interest rate isn't good enough -- it's worth the time and effort to get the best possible rate.
It's also important to look at the annual percentage rate (APR) -- not just the loan's interest rate -- when comparing mortgages. This includes things like the lender's origination fee, as well as any discount points you pay when obtaining a mortgage. In most cases, a mortgage's APR and interest rate are close, but it's important to focus on APR when trying to get the best rate.
By far, the number one factor that determines your mortgage APR is your credit score. As of this writing (August 3, 2020), the average 30-year mortgage APR in the United States is just below 3%. However, the average rate for top-tier borrowers -- those with FICO credit scores of 760 or higher -- is just 2.663%. On a 30-year, $300,000 mortgage, this translates to $19,440 in interest savings versus an APR of 3%.
Did you know there's a special rule in the FICO credit-scoring formula that encourages you to shop around for the lowest mortgage rate? It doesn't matter how many lenders you fill out mortgage pre-approval applications with -- as long as they take place within a typical shopping period, usually defined as two weeks -- they'll count as a single credit application for scoring purposes.
You might be surprised at the different rates offered by lenders for the same borrower. Sure, it might take you a few hours to fill out a handful of mortgage applications, but the long-term cost savings can be well worth the effort.
If borrowers put more skin in the game, they seem like lower risks to lenders. So, while you can get a conventional mortgage with as little as 3% down, lenders often take the size of the down payment into account when determining a borrower's interest rate. This is even true if you're planning to make the industry-standard 20% down payment -- I recently ran a mortgage quote with a proposed down payment of 20% and another with 25% down, and there was a significant difference in the mortgage rates I qualified for.
The bottom line? If you find the lowest possible mortgage rate in the lowest interest rate environment in modern history, you'll be able to save serious money over the term of your loan. As we've seen, a seemingly small difference in rates can put thousands of dollars in your pocket, giving you more to save, invest, and use to enjoy life.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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