How to get the best mortgage rate for your home.
In this article we outline some of the factors to consider when selecting a mortgage lender and loan program.
Buying a home is a big deal – in fact, it’s probably the biggest financial decision you’ll make (or at least until you buy your next home).
If you’re a first-time home buyer you may be surprised how many small things go into a basic home loan.
Applying for a Home Mortgage
Here’s some of the options you’ll get to decide on when buying a home.
- Down payment amount (3.5% – 20%)
- How much money you want to borrow
- Type of mortgage program (ex: fixed or adjustable)
- Term length (usually 15- or 30-year mortgage)
- Get pre-approved for the loan
- Negotiating closing fees
How to Pick a Mortgage Lender
Before meeting with lenders you should have a good idea of the type of loan programs you qualify for – and know the ballpark interest rate of each.
Example #1: If you are a low income buyer you may qualify for a FHA mortgage.
Example #2: If you can afford a 20% downpayment, you can choose between a traditional fixed-rate or adjustable-rate mortgage.
A good mortgage lender can help you sort out the specifics and help you narrow interest rates to expect for each type of loan. Since interest rates can change daily, ask if they can lock you into a rate.
Here’s the general credit scores required to qualify for popular loan types.
|Mortgage Program||Min. Credit Score||Who|
|Fixed Mortgage Loan||620+||Most popular type.
Fixed rate is a less risky loan.
Homeowners not expecting to move in next 10-years.
|Adjustable Rate Mortgage (ARM)||620+||"Teaser rate" the first 12-24 months.
ARM loans can change on a quarterly basis.
Considered more "risky" vs. fixed rate mortgages.
Homeowners who may move within next 10-years.
|Jumbo Mortgage||700-850||Buyers buying an expensive home.
Can afford 10-20% downpayment.
|FHA Loan||500 (10% down)|
|For lower income buyers w/ fair credit score.|
|USDA Loan||640||Buying in a rural area.|
|Non-qualified Mortgage||500-580||Borrowers with poor credit scores and don't qualify for gov-backed mortgages.|
|Veterans (VA Loan)||640||Eligible U.S. veterans|
A good mortgage lender should be straight-forward, and layout all your options. Ask the lender if they will be the one servicing your loan and talk with 2-3 lenders to see which you feel the most comfortable with.
Pro Tip: When asking for quotes, be sure to let lenders know the price range and type of home you want to buy.
Determine the Loan Amount
This seems simple enough — Find a home, and subtract your down payment from the price you’ve agreed to pay. Be mindful of the add-on expenses though!
Additional mortgage expenses:
- PMI: mortgage insurance (if putting less than 20% down)
- Closing fees – property taxes, title change, broker fees, etc.
- Attorney and lender costs
- Interest paid to the lender
- Homeowner’s insurance
See all the things that go into home closing costs here.
The size of your loan may may affect your interest rate and your monthly payment. If signing a 15- or 30- year mortgage, make a list of the large expenses that you anticipate happening before the loan is paid.
Major Life Expenses
- Are you expecting to have children?
- Is your spouse going to be a stay-at-home or is daycare needed?
- Will you have to pay for college tuition?
- Do you have elderly parents who you assist financially?
- Do you think you will have to relocate for work?
Be sure that you are comfortable paying the monthly payment, including principal, interest, taxes, and insurance, as well as homeowners’ association dues, if you are considering a home or condo that requires that monthly cost.
If the loan is a stretch on your budget, try increasing your down payment to lower your the loan amount. Or maybe wait a bit longer to buy a home?
Choose the Type of Mortgage Loan
While there are a lot of home mortgage options, the basic loan types are fixed rate, adjustable rate, interest only, and hybrids (a combination of fixed and adjustable).
- Fixed loan mortgage offers a fixed interest rate for the entire loan.
- Adjustable-rate loans will have fluctuating interest rates.
It is important that you understand how your payment could change and how quickly it will pay down the balance of your loan. No matter which loan you choose, make sure that you can comfortably afford the monthly payment, which includes principal, interest, taxes, and insurance.
When shopping for loans online, also keep in mind that an advertised rate isn’t always the same as your loan’s annual percentage rate (APR), which is the total cost of your loan stated as a yearly rate, plus the loan fees.
Also, be aware that an “introductory rate” is designed for promotional purposes and are often based on ideal credit scores, debt-to-income ratio, and down payment funds. The actual rate you would pay will be based on your own personal situation and may be higher.
Online mortgage calculators make it easy to compare quotes. When you look at the rates lenders offer, compare loan APR rates vs. others.
Best Online Mortgage Calculator
- Bankrate Mortgage Calculator
- Nerdwallet Mortgage Calculator (with PMI and Taxes)
- Zillow Mortgage Calculator
- Bank of America Online Mortgage Calculator
Mortgage Term Length
For most people, a home mortgage loan term is usually 15 or 30 years. There is also a 10-year loan option available, but the shorter terms will generally have a higher monthly payment. The upside is that they will let you build equity faster (since you pay down the balance of the loan faster) and will end up saving more money in interest over the life of the loan.
Longer terms usually carry lower monthly payments but end up costing more in total interest paid.
If you are 62 or older, read about the benefits of a reverse mortgage here.
Negotiate Your Interest Rate
You can save on homeowner costs by painting a better financial picture for mortgage lenders. Your credit score will have a massive impact on the down payment, the interest rate, and the type of loans you can choose from.
Having excellent credit means a lower rate, while an average credit score can increase it. A bad interest rate can mean that you won’t qualify for a loan and may you need a cosigner to get approved.
Another way to lower your interest rate is to buy points when you take out your loan. A “point” is equal to 1% of the loan.
Example: One point on a $200,000 loan equals $2,000. Ask your lender how much each point will reduce your interest rate. If you pay $2,000 to buy one point on a $200,000 loan, and the interest rate reduction translates to your payment being lowered by $35 per month, it will take you less than 5 years to recover the cost of buying the point!
Manage Your Finances
For those deciding whether they want to rent or own, the mortgage interest rate you get can make all the difference.
Even if you are approved for a loan, it important that you do not to deplete your savings when buying a home. In fact, having strong savings will positively affect your ability to get a loan, as most lenders require that you have emergency “reserves” in the bank and investments when you close on the house.
Below are three ways to manage the costs associated with taking out a loan.
Mortgage Loan Costs
1. Home Closing Costs
These are paid at the final signing of the loan and may include fees for preparing and filing a mortgage, title search, insurance, attorneys’ fees, and other customary fees. Home closing costs can be anywhere from 3% to 7% of the property value and is split between the buyer and the seller.
Most people will pay roughly 3% of the loan in closing costs.
If you don’t want to make such a large cash payment at closing, you can work with your lender to minimize this expense. Some lenders offer small fixed-fee or no-fee mortgages, where buyers pay little to nothing out-of-pocket at closing. In most cases, these costs are rolled into the loan principal, so you would be, in effect, financing the closing costs.
** Another strategy is to ask the seller to pay your closing costs. In a market where the supply of homes is more abundant, sellers may be more willing to consider this.
2. Pre-payment Penalties
Some lenders will offer an interest rate reduction in exchange for your agreement to accept a prepayment penalty. This is an agreement that you will pay a penalty if the mortgage is prepaid within a certain time period.
Prepayment penalties come in two types:
- “Hard” Penalties: if you refinance your loan or sell your home within a certain time period
- “Soft” Penalties: fees that apply if you refinance your loan.
Both types apply to a fixed time period, and generally offer more savings the longer you agree not to refinance or sell the home. The important thing is to be aware of any loan penalty and to be comfortable that its terms are the right choice for you. Your lawyer should be able to advise you on this, given your circumstances.
Before accepting a prepayment penalty, ask yourself:
- Do I plan to refinance or move soon? (ex: relocation for work)
- What is the cost of the penalty?
- Given my situation, do I think the lower interest outweighs the risk?
3. Private Mortgage Insurance (PMI)
If you choose to put less than 20% down payment on the house, you will probably be required to make a monthly insurance premium payment in addition to regular mortgage payment. PMI can save you from making a large up-front down payment, but will increase your monthly payments and make it more expensive over the life of the loan.
If you don’t have the 20% down payment available, discuss with your lender whether it makes sense for you to continue saving or to pay for PMI.
Mortgage insurance is often seen as a hidden expense for homeowners. Depending on the type of loan you have and the amount you put down, PMI can be 0.5% to 1.0% of the entire loan amount.
How To Get The Best Mortgage Rate
There are a lot of factors that impact your ability to get favorable loan terms. Timing is everything, and your personal situation and the economy will determine your ability to negotiate.
If you’ve read this far, ask yourself these questions:
- Is this the best time for me to buy a new home?
- How much debt do I currently have?
- Is my credit score above 700?
- Have you saved enough for a down payment? What percentage can I put down?
- Do you have plans to relocate?
- Any big expenses over the next 5 years? In 10 years?
Read our article on how credit score affects loan options.
The timing of your home purchase should be based these types of questions. If you’re not ready, you re-visit it when you are ready. The key to making a big purchase is stability. You should be certain that you aren’t over-extending yourself or locking yourself into an unfavorable interest rate.