Whether you’re planning on buying a home—or have plans to refinance for your current one—you probably want to find the best interest rate possible on your new home loan.
The good news is that mortgage interest rates are at historic lows, with a 30-year fixed rate loan coming in at under four percent in August, according to Mortgage News Daily, an organization that provides housing news and analysis.
Still, you’ll want to do your homework (no pun intended) to get the best rate you can. Your first assignment: Check out these experts’ tips on how to get the best deal on your mortgage rate.
Tip #1: Shop Around
A no-brainer of a tip, you say? After all, shopping is as American as good apple pie and bad politics. But here’s the thing: at first glance, the nuance in rates could be deceiving.
"Right now, rates are pretty standard from company to company," says Don Frommeyer, president of the National Association of Mortgage Brokers (NAMB), the nation’s only trade organization of mortgage professionals.
In fact, Frommeyer says that most companies’ rates are going to be within an eighth of a point or so. This slight difference might just have you thinking, "So why shop to save an eighth of a point?"
Here’s why: That eighth of a point could result in you paying a lot more than you think over the life of the mortgage.
To give you an example, we did the math for one comparison by using this Yahoo! Homes Mortgage Calculator.
Our example assumes a person is borrowing $300,000, choosing a 30-year fixed rate, and has "good" credit. Here’s how that breaks down for two loan rates an eighth of a percentage point (or .15 percent) apart:
|Loan A||Loan B|
|Interest Rate||3.75 percent||3.90 percent|
|Monthly Loan Payment||$1,389.35||$1,415.00|
|Total Payoff of Loan in 30 Years||$500,164.84||$509,401.66|
|Total Interest Paid in 30 Years||$200,164.84||$209,401.66|
Difference in Interest: Loan B is $9,236.82 more expensive.
Although the monthly payment isn’t that different, over time the total difference in interest could be enough to put in new wood floors.
And remember: this is just one example. You can see how much you might save by creating your own.
Tip #2: Understand Common Costs and Fees
Did you know that interest is not the only cost associated with a home loan? In fact, there are a host of other fees and costs.
To help you sort them out, we have included a list of common fees, along with some average costs, according to "A Consumer's Guide to Mortgage Settlement Costs" - published by the Federal Reserve Board, the main governing body of the Federal Reserve System that oversees national monetary policy and banks.
And keep in mind that there could be additional costs, depending on factors like the type of loan, the loan amount, your lender, or your state of residency.
Application Fee: Your lender charges this fee to cover processing your loan request and checking your credit. Median cost: $365.
Loan Origination Fee: This is charged by your lender to cover such things as attorney fees, document preparation fees, notary fees, and more. It might be called an underwriting fee, administrative fee, or processing fee. Median cost: $2,734 with a 5 percent down payment; $2,537 with a 10 percent down payment.
Points: These represent a one-time fee from the lender, usually to reduce the interest rate of your loan. One point equals one percent of the loan’s amount. For example, one point on a $200,000 loan is $2,000. These fees are usually between 0 percent and 3 percent of the loan amount.
Appraisal Fee: This pays for a professional appraiser to determine the worth of the property you are buying. The lender wants to make sure the property is worth at least as much as the loan amount. Median cost: $292.
Lender-Required Home Inspection Fees: Depending on the area in which you are buying the home, the lender may want a termite inspection, or an analysis of its structural integrity, or even of the septic system. Estimated cost is $300 to $500.
Private Mortgage Insurance (PMI): The lender will usually require mortgage insurance if your down payment is less than 20 percent of the home’s price. This insurance covers the lender's loss if you don’t make the mortgage payments. Estimated cost is $50 to $100 per month.
Tip #3: Be Honest
In case you haven’t noticed, it’s not the early 2000s anymore. And in the mortgage qualifying world, that means lenders actually want more than a pulse and a promise that your financial information is correct.
Yes, after the years of slack lending policies, banks are now much more careful about whom they qualify for a loan, says Fred Arnold, the treasurer of NAMB and a mortgage professional.
So how has the loan qualifying process changed? According to Arnold, there is a lot more paperwork, and lenders will definitely verify everything you submit.
But he adds that even if you have some blemishes on your financial record, that’s no reason to give up on qualifying. In fact, helping you deal with any imperfections is part of your mortgage professional's job. So always be honest about your financial record, sooner than later.
"Tell your loan officer about any problems you have, such as a collections account, so he or she can help find a solution," says Arnold. "The quicker you know of a problem, the sooner we can tackle it and minimize its affect on you qualifying."
And besides, honesty is always the best policy anyway, right?
Tip #4: Protect Your Credit Score
We all like to think that we are more than just a number. But the reality is, your credit score is the number one thing that a lender will consider when you apply for a loan, says Frommeyer.
The Fair Isaac Corporation (FICO) credit score is commonly used as the standard measure of a consumer's risk, according to Frommeyer. A FICO score ranges on a scale from 300 (worst) to 850 (best).
Keep in mind that your credit score not only determines whether or not you qualify for a loan at all, but it can also have a big say in the rate you get, adds Frommeyer. Ultimately, the higher the score, the better the rate.
To get the best rates available - according to Chris Boulter, president of Val-Chris Investments, Inc., a California company specializing in residential and commercial loans - you'll need a credit score of at least 720.
Check out the example on FICO's website, which quantified the difference between rates for the highest and lowest credit scores on a loan of $300,000: If your credit score is 760 or up, FICO says your rate would be 3.254 percent* with a monthly payment of $1,306. Drop that score to 620 - 639, and your rate jumps to 4.843 percent* with a monthly payment of $1,582.
Over the 30-year life of the loan, that adds up to the borrower with the worse credit (lower credit score) paying $99,360 more in interest than the borrower with the best score.
Steps to Good Credit:
- Frommeyer and Arnold both suggest checking your credit as often as possible. You can get a free credit report annually through AnnualCreditReport.com.
- In addition to paying bills on time, they suggest not opening too many lines of credit in a short period of time. A few per year is okay, but lenders are typically wary of people they determine to be "credit dependent."
- They also say to clear up any problems or mistakes immediately. Lenders don’t want to hear explanations; they want to see solutions.
Tip #5: Make a Big Down Payment
We know, this one is easier said than done. After all, we’re sure you’d probably buy your house outright and avoid all the red tape of a mortgage if you could.
While that’s likely not going to happen, there are still some good reasons to make the biggest down payment you can. One is that you actually own more of the house and start out with more equity, according to Frommeyer.
Another biggie is you avoid having to purchase Private Mortgage Insurance (PMI). This is insurance that the lender requires if you can’t make a down payment of at least 20 percent of the home’s price, according to the Federal Reserve Board's "Consumer's Guide." Basically, if you don’t make your loan payments, this insurance protects the lender against financial loss.
Although the cost of PMI varies with the price of the home, according to the Federal Reserve Board, a good estimate is $50 to $100 per month.
*Interest rates are accurate according to FICO.com, as of August 16, 2012.