Tips on scoring the best rate on a home loan
Mortgage interest rates have hovered near historic lows in recent years, but change may be on the horizon.
The Federal Reserve is considering increasing the short-term interest rate it controls as early as June. That could send mortgage rates moving higher again.
For now, rates remain homebuyer-friendly. The national average rate for a 30-year, fixed mortgage fell to 3.75 percent recently. It was 4.28 percent a year ago.
That’s good news for homebuyers, who despite signs that the economy is recovering, are always looking for ways to save.
Still, landing the most affordable mortgage depends on more than getting the lowest rate. The rate borrowers qualify for hinges on several factors, including their finances, credit score and the size of the down payment they’re prepared to make. And the type of loan and the fees that come with it also determine the overall cost of a mortgage.
“As rates go up it will affect affordability,” said Greg McBride, chief financial analyst at Bankrate.com. “But rate is not going to be your only loan consideration. You don’t buy a house because of low interest rates any more than you get married because of a sale at the bridal shop.”
Here are some tips on how to get the best deal on a mortgage:
Size up your credit: Mortgage lenders consider three key factors to determine what rate they can offer a borrower: Good credit, proof of income and size of the down payment. Strength in one category can offset a deficiency in another, but having a FICO score of 740 or better out of 850 will generally qualify borrowers for the lowest mortgage rate.
You can qualify for a home loan with a lower credit score, but you’ll pay a higher interest rate.
If your FICO is below 740, review copies of your credit files for errors that may be weighing down your score. Consumers are entitled to a free credit report every 12 months from the three major credit-reporting firms — Equifax, TransUnion and Experian. Go to Annualcreditreport.com.
The credit firms are required to respond to error disputes within 30 days, so it pays to do this well in advance of when you intend to buy a home. Think at least six to eight weeks.
The ratio between available credit and how much debt you’re carrying is another key element of the FICO score. A good rule of thumb is to keep debt at less than half of your available credit. Reducing that ratio alone can often bump up your score.
Shop around: Before you begin your home search, ask a lender to assess how much you can borrow. The lender will conduct a thorough credit and income review and issue you a pre-approval letter, which will give a seller solid indication of what you can spend.
But don’t necessarily go with the loan terms the lender is offering. This is a good time to do some comparison shopping for more favorable mortgage deals.
Websites such as Bankrate.com, LendingTree.com and Zillow.com offer a quick way to get a flavor for the kind of offers that may be available. Also check whether your current bank or credit union offers a better deal because you have an account there.
Make sure you’re comparing the same loan types, too. How much you pay in interest and over how long a period will differ significantly between a typical 30-year, fixed-rate loan, a 15-year mortgage or an adjustable-rate mortgage.
When you go fishing for rate quotes do it on the same day. That’s essential for a proper side-by-side comparison, as rates can change day to day, altering what’s available.
“Lenders see the market differently at different times,” said Doug Lebda, founder and CEO of LendingTree. “The timing matters.”
Keep an eye on fees: When you comparison shop for a mortgage focus on the annualized percentage rate, or APR. That includes the interest rate, which is the cost of borrowing the money, as well as closing costs and additional fees charged by the lender.
Mortgage lenders charge fees for the mortgage broker’s services, credit reports, a home appraisal and title insurance, among other costs. These are included in the “good faith estimate,” a form that lenders are required to provide.
Keep in mind that these fees can change until your interest rate is locked in. That’s when the lender agrees to set the rate and fees for your loan at the levels they will be when you complete the transaction.
Negotiate: The various fees that lenders charge on top of the interest rate may offer you some room to negotiate a better deal, especially if you have comparable rate quotes from other lenders.
Once you negotiate a reduction in those fees, they are locked in along with the interest rate, which means you’ll know exactly how much your loan will cost you.
You won’t be able to negotiate a better deal on some of the other costs, including third-party fees like the appraisal, title search and taxes, however.
Some lenders itemize various fees. Others may aggregate everything under one or two fees and call it an origination fee. That’s one reason it’s important to have more than one good-faith estimate when comparing offers.
“You want to apply with more than one lender, so that once you get the good-faith estimate, then you can take a deeper dive on what the complete terms are, more than just the interest rate,” McBride said.