7 Tips for Mortgage Rate Shopping
Certified Financial Counselor
Ashley Altus is a writer and certified financial counselor through the National Association of Certified Credit Counselors.
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When it comes to securing a mortgage loan, it’s crucial to do your homework so you understand all of the options available. Mortgage rates vary between mortgage lenders. Receiving one additional rate quote can save an average of $1,500; receiving five quotes can save an average of about $3,000, according to Freddie Mac.
However, less than 50% of homebuyers talk to more than one lender, Freddie Mac reports, often because it’s a difficult and time-consuming process to receive multiple, personalized loan offers. Most mortgage lenders require a lengthy loan application in addition to a full credit check to get you an offer.
Arming yourself with accurate, personalized data is crucial to effectively shop for a mortgage. Here are seven tips that will guide you when you’re rate shopping.
Tip 1: Improve Your Credit Score
Credit scores are used to help mortgage lenders determine who qualifies for loans and the interest rates they’ll pay. Financial experts recommend that borrowers should begin inspecting their credit reports at least six months prior to applying for a mortgage loan. This will allow time to spot any inaccuracies, pay off any high-interest debts, and improve your debt-to-income ratio. Debt-to-income ratio compares your monthly debt payments to your monthly gross income. It helps lenders assess your ability to repay a loan.
You can’t begin shopping for a mortgage until you understand your credit history and the impact it has on your credit report. Armed with the knowledge of your financial standing, you will be in a better position to shop for a mortgage and find the best mortgage lender.
Tip 2: Consider A Variety of Mortgage Types and Terms
The best mortgage lenders will offer a variety of different home loans, but not every mortgage company may be able to offer the loan type best suited to your needs. Shopping for a mortgage will give you a chance to view the offerings from other mortgage lenders so you can find the home loan that best meets your needs.
When shopping around for a mortgage, it’s important to understand which type of home loan is the best fit for you. This can drastically impact the rate you’ll end up paying.
Conventional vs Government Loans
If you can qualify for a loan with low down payment options, like a Federal Housing Administration (FHA) or a Veterans Affairs (VA) loan, you should strongly consider it. These types of loans, which are backed by the government, typically don’t require as large of a down payment as conventional loans.
Conventional loans are a type of mortgage loan that is not backed by a government agency. Instead, conventional loans are funded by private financial institutions, such as banks and mortgage companies. These loans follow guidelines set by government-sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac.
Conventional loans are offered by direct mortgage lenders, like savings and mortgage companies. Some conventional loans require down payments as low as 3%, but if you put less than 20%, you will likely be required to pay Private Mortgage Insurance (PMI).
There are two types of conventional loans: “conforming” and “non-conforming.”
- Conforming loans meet the underwriting requirements of government-sponsored agencies Fannie Mae and Freddie Mac. The loan size is set at the county level.
- Non-conforming loans do not meet the standards set by GSEs, such as Fannie Mae and Freddie Mac. These standards include requirements for the borrower's credit score, debt-to-income ratio, and the type and value of the property being purchased.
Mortgage Term Options
In addition to choosing which type of mortgage best suits your needs, you’ll need to review the following two mortgage loan term options:
- Fixed-rate mortgages: These types of mortgages lock in the same interest rate and monthly payment for the life of the loan.
- Adjustable-rate mortgages: With these types of mortgages, the interest rate and the monthly payment adjust automatically under terms set when the loan documents are signed.
There are pros and cons to both types of mortgage loans. However, many people choose fixed-rate mortgages over adjustable-rate mortgages because you always have the ability to refinance your loan when rates drop.
Tip 3: Get Multiple Loan Estimates
Various types of lending institutions are available to finance your home. These include local banks, credit unions, and large banks, or you can also choose to go through a mortgage lender. In certain cases, different lenders will serve your needs best, so it’s important to weigh your options to determine which is the best fit for you.
Start off by reaching out to get at least three personalized Loan Estimates (LEs) and compare the full loan scenario, including information about monthly expenses, estimated interest rates, points, lender credits, lender fees, and closing costs. Think of three as the minimum requirement as you’re mortgage rate comparison shopping. Get as many estimates as you can to ensure you’re getting the best deal.
Tip 4: Know the True Cost of the Loan
When mortgage rate comparison shopping, you’ll want to know the actual cost of each loan. Compare every detail of a loan estimate including the loan amount, interest rate, upfront costs, and mortgage insurance payment.
Some lenders may offer a loan with a low interest rate, but then charge additional fees upfront. For this reason it’s a good idea to not only look at each loan’s interest rate, but also the annual percentage rate (APR), which includes any other fees and charges you need to pay to obtain the loan.
Tip 5: Negotiate your Rate
Having obtained multiple rates, you’ll be able to negotiate to receive the best offer. For example, if one lender is offering a lower interest rate, but another has better closing costs, you can use the rate from the first lender to bring down the second and ultimately lower your overall costs.
Remember, lenders have leeway with the rates and fees they offer, and they’re often willing to negotiate to get your business.
Once you have been offered a mortgage rate that fits your budget and you’re happy with the proposed terms, be sure to confirm your loan is “locked” with a formal loan estimate to ensure you avoid a lender changing the terms as the markets fluctuate.
Tip 6: Shop for Rates in the Same Time Period
In order to process your financials and offer you loan terms, lenders will run a hard credit pull. This type of credit inquiry can lower your credit score temporarily – although generally only by a few points – because it is considered a sign of increased need for credit and therefore, an increased credit risk. However, there are some exceptions to that rule.
When a hard credit pull is made, it is recorded on your credit report, and it can signal to other lenders that you have applied for credit. However, if there are multiple hard inquiries on your credit report within a short period of time, it may indicate to lenders that you are taking on too much debt or that you are struggling to manage your finances. This can result in a lower credit score because it suggests that you may be a higher risk borrower.
After a hard credit pull for a mortgage, you have about 14 business days to compare rates from other lenders without having another hard credit pull lower your score further. If you want to compare interest rates and loan terms, make sure you don’t wait too long.
Multiple hard credit pulls can hurt your credit score and affect the mortgage you qualify for.
Tip 7: Don’t Take Advertised Mortgage Rates at Face Value
When you shop for a mortgage lender online, it’s important to keep in mind that advertised rate quotes are rough estimates that, too often, represent an idealized scenario. Advertised rates are different from the loan terms you’ll actually be offered.
This is because advertised rates don’t necessarily reflect your personal financial situation. It’s likely an advertised rate reflects the best borrower possible—the one with a perfect credit score, small debts, and large down payment.
As you very likely know, buying a home is about as big a financial decision as you can make. Mortgage rate shopping is a crucial part of the process and when done correctly, it can lead to significant savings over the lifetime of your loan. By following the steps above, you'll be able to attack the mortgage rate shopping process with confidence and ultimately make a well-informed decision that positively impacts your financial future.