How to Get the Best Mortgage Rates
What Are Mortgage Rates?
Mortgage rates are little numbers that are a big deal for anyone looking to purchase or refinance a home. Interest rates are a percentage of the overall loan you take out, so a higher or lower rate will quickly add up to figures in the tens of thousands of dollars range. This is why people search for the lowest rates possible when comparing loan services. But, what is the current going rate, what is considered a good mortgage rate, and what should you be going for? Find out what you need to know about what they are and how to obtain the best mortgage rates.
What is a Good/Low Rate for a Mortgage Today?
To begin with, the rate you are given is dependent on several factors, including the lender, the value of the house, and your current financial situation. The most important factor, though, is your credit score. Your credit score doesn’t just determine whether or not you’ll qualify for a loan at all, but it also sets the bar for what type of interest rates you’ll be offered. The better your credit score, the better the interest rates you are going to see on offer. What qualifies as a good rate for someone with poor credit will not be considered a good rate for someone who has excellent credit.
Interest rates and credit scores are inversely proportional, meaning when one goes up, the other goes down. For example, in today’s mortgage market, someone with a credit score of 620 will likely find a 5% APR very reasonable. On the other hand, someone with a score of 760 or higher should be able to get a rate significantly lower, somewhere around 3.4%.
How to Find the Best Rates
Finding the best rates is a matter of sifting through the competition. Today, you can do this automatically with the help of lender portals like LendingTree that aggregate thousands of offers to give you the best of the best at a glance.
Additionally, if you want to get the best mortgage rates, you should start by improving your credit score. You can do this by removing any erroneous marks on your report, paying off loans, resolving any credit issues that are related to your accounts, and consistently making on-time payments to your credit cards and other forms of debt.
Why it's Important to Compare Rates
Comparing mortgage rates is the simplest way to save money on your home loan. If you accept the first offer you see, you are likely to regret it later. With so much competition in the lending industry today, you can usually find a lower rate if you do a little price comparison. As mentioned, loan aggregators like Rocket Mortgage will give you multiple offers simultaneously to make this step effortless.
What are the Different Types of Rates?
Not all interest rates are created equal. There are different types, and each has their own benefits, including:
A fixed interest rate is one that remains the same throughout the entire time you are paying off the loan. The rate is predetermined, so if you like consistency and want to know exactly what you’ll be paying, this is the better option for you.
Variable rates fluctuate during the course of the loan based on the current index value. The rate can fluctuate, and go up or down depending on the market. People who want to try to save some money on their loan can opt for a variable rate. If the rate goes down, you'll make a lower monthly payment for that period.
These rates are charged on an upward curve, meaning you pay less each month at the beginning of the loan and gradually increase your monthly payments as the loan progresses. The actual interest rate doesn’t change, but the total amount you pay will decrease because you will be paying off more of the loan as time goes on.
What Factors Affect Your Mortgage Rate?
Several factors go into the equation when a lender makes you a mortgage rate offer. Some of the most important ones are:
- Employment Regularity
It’s important for you to show that you are consistently earning an income, so employment stability is critical. Most lenders want at least 2 years of employment either at the same job or at an increasing salary ratio (meaning you left your job because you got offered a higher salary elsewhere). Self-employment is much stricter, so be sure to have all of your tax forms and income documentation in order before applying for a mortgage if you are self-employed.
- Credit Score
As mentioned, this is probably the biggest factor (but not the only one) lenders consider. A high credit score will ensure that you are approved more easily and will give you more options to choose from. Anything lower than 620 will make it much more difficult to find a lender to approve you for the loan, and will likely come with several stipulations such as high APRs and a significant downpayment. FHA and other government-dictated loans have more lenient terms, so someone with a credit score of 580 can still get approved for a loan.
Your debt to income ratio is another important factor that lenders consider. This is a calculation of how much debt you have (including monthly payments you make, other loans, other types of debt, and the mortgage you are applying for) divided by your gross monthly income. The maximum DTI that most lenders will accept is 36%, though you can frequently find lenders that will give higher ratios, particularly if you are in good standing in all other areas of consideration. The lower your DTI, the lower your interest rate will generally be.
- Down payment
Sometimes, lenders will let people with lower credit scores compensate for the lack by putting down a larger down payment. Essentially this lowers the mortgage loan amount, making you less of a risk overall. The higher the down payment, the better rates you’ll receive. To get the best mortgage rates available, you’ll need to put down 20% or more of the loan. Additionally, a down payment below 20% will require you to pay private mortgage insurance (PMI). This can translate to a lot of money added to your monthly and annual payments, so do the math when you're looking at loans.
- Size of the Loan
The larger the loan you wish to take, the greater the risk you pose to the lender. Therefore, if you want to take out more money, you are going to be charged a higher interest rate in order to cover the greater risk.
- Additional Terms
Additionally, lenders will look at other factors such as cash reserve, length of repayment terms, and home location. All of these factors combined will create your personalized mortgage rate.
How to Find the Best Rates for You
Just remember, that the best rate for someone else may not be the best rate for you. Bearing that in mind, you can get the best mortgage rates for you by following a few of these pointers:
The easiest way to find the best rates is to shop around. This is really easy in today’s internet-driven world. There are loan calculators, comparison tools, lender portals, and more all designed to help you line up offers to see which is giving you the best deal possible.
Don’t Be Afraid to Negotiate
Lenders deal with flexible situations, fluctuating rates, and fluid terms all the time. So it isn’t unreasonable to be straightforward with a lender and ask for different terms that are more suitable to your needs. The worst case scenario is that they'll say no, and the best is that they'll say yes and you'll have a more comfortable mortgage to work with.
Read all the Terms
Reading and understanding all the terms involved with your mortgage will help you get the best mortgage rates for you. Consider what's important to you, what your financial situation is, and what terms are suitable to accept for signing anything.
See If You Are Eligible for Special Programs
Frequently, people are eligible for mortgage discounts that they aren’t even aware of. If you are a military serviceman or veteran, for example, you can apply for a VA loan. These government-run loans are significantly easier to get approved for, come with lower interest rates, and require no PMI. Often, credit unions will offer preferred rates to their members as well. Do a little research, and you may be pleasantly surprised to learn that you are entitled to a discount.
What to Consider in Addition to Rate
We briefly touched on the idea that rate is not the only factor you should consider when comparing loans. In fact, the rate is secondary compared to the more important goal of lowering the overall costs of the loan. In addition to interest rates, look at:
In addition to the interest and your monthly payments (known as principal), there are several other charges you may be responsible for. Real estate taxes, insurance (title, private mortgage, and homeowners’), and fees like closing costs and appraisal fees will add up to a lot. You’ll also need to cover certain legal fees, such as escrow fees, origination fees, document preparation fees, credit report fees, inspection fees, state recording fees, and survey fees, so make sure to calculate all these costs into the final price and budget.
When taking out a mortgage, you are dealing with large sums of money, long-term commitments, and lots of complicated industry terminology. You want a lender that will take the time to help you understand everything that is being said, walk you through the process, and be there to answer any questions that come up. A lender’s reputation will tell you a lot about the company. Not to say a newer startup can’t have excellent customer service, but it’s important to do your research and see what type of company you are getting into bed with.
The repayment terms of a loan are vitally important for tailoring the mortgage to your needs. It won’t do to apply for a loan that won’t let you pay it out in the amount of time that is suitable for your financial situation. You may require a longer or shorter repayment plan than this lender has to offer, in which case it is not the best fit for you.
The APR will actually give you a more accurate picture of what you are going to be spending on this loan. It is the annual percentage rate, and it combines all of the expenses involved in the loan, including interest, monthly payments, and fees, for a total picture of what you’re going to pay.
How are Mortgage Rates Set?
In simple terms, mortgage rates are set by the secondary mortgage market. This marketplace is where investors buy off mortgages from the lenders in order to receive a return on investment (i.e., your monthly payments+interest). The higher the interest rate, the more appealing it is to investors. However, too high, and potential borrowers won’t want to borrow from that lender. So, it is a balance between the two that sets the actual rates. Other factors include inflation, Federal Reserves prices, and US treasury rates.
Is the Lowest Rate Always the Best Option?
As a matter of fact, the lowest rate doesn’t always indicate the best mortgage for you. There are various other factors to consider, such as the reputation of the lender, length of repayment plan, customer service, and other terms that apply to the loan. The combination of all of these factors will give you the best mortgage loan in general, and more importantly, the best loan for your specific situation. For example, someone who wants to take out a loan and pay it off over 30 years will not be well-served by a company that only offers 20-year repayment terms, even if it is offering competitive interest rates. Consider all the factors involved in the loan and not just the interest rate before deciding on a lender.
See our reviews of the leading mortgage loan companies for more information on rates and terms.