Getting the best rate on your mortgage is important and can save you a ton of money over the life of the loan. Over the life of a 30-year mortgage, the interest paid alone can amount to almost as much as the cost of the home you are buying, depending upon the rate and other factors.
With the changes in the tax rules that preclude many homebuyers from fully deducting the interest and property taxes associated with their home, its more important than ever to get the best rate and overall terms possible on your mortgage.
Here are some tips on getting the best rate on your mortgage.
How to Find the Best Mortgage Rates
1. Shop Around
It pays to shop for the best rate among a number of lenders, including different types of mortgage lenders. This includes your own bank or credit union, but also online mortgage lenders. A combination of banks, online lenders, credit unions and others should give a good sampling of what's out there for you. Even a small difference in the rate or other terms can translate to huge savings on a loan of this size, especially for one that could last for 30 years. Doing your homework can really pay off here.
2. Use Your Research to Negotiate a Better Rate
Being informed is a key advantage when looking for the best mortgage rates. Your research should arm you with information about the mortgage market in general and specifically for borrowers who fit your profile. Use this information to negotiate the best rate possible.
If you have solid credit, earn a good income and are buying a home that fits your economic situation, lenders are likely to want you as a client. If you have a relationship with a bank, take the best deal you've found and ask them to match it. If they view your relationship with them as valuable, they just might accommodate you.
3. Work With an Experienced Mortgage Professional
An independent mortgage broker can help you find the best lender and the best type of loan for your situation. Be sure that you find one who is independent and who can work in their client's best interests.
4. Have a High Credit Score
The best mortgage rates go to those who are the most qualified borrowers. A major piece of being a highly qualified borrower is having a high credit score. Those with a FICO score of 800 or more are generally considered to be the most desirable borrowers.
Well before you begin shopping for a mortgage, do what you can to build up your credit score.
- Pay your bills on time.
- Pay down your outstanding lines of credit including credit cards.
- Don't apply for too much credit.
- Check your credit report at all three major credit bureaus to ensure there are no inaccuracies. Correct any errors that you find.
5. Save for a Decent Down Payment
Those borrowers who pose the least risk to lenders will receive a better rate, all things considered. For conventional loans, having a 20% down payment will exempt you from having to pay the cost of private mortgage insurance (PMI). This will automatically reduce your borrowing costs.
A bigger down payment shows the lender that you have "skin in the game." A lender will generally offer a better rate for someone making a substantial down payment as they will be viewed as a better risk than someone with little or none of their own money involved.
6. Buy a Home You Can Afford
While this may seem like common sense, all too often people stretch for more house than they can afford. Being "house poor" isn't good for your financial health and buying too much house will be noticed by mortgage lenders. If they do approve you for a big enough loan, it's likely the rate you pay won't be as favorable as you might like.
7. Size Matters
The FFHA increased their conforming loan limits to $484,350 for 2019. This limit represents the dollar cap on the mortgage loans that Fannie Mae (FNMA) and Freddie Mac (FMCC) will guarantee or purchase from lenders.
The rates on conforming loans will therefore generally be lower than those for jumbo loans because these loans are guaranteed and are easier to sell.
The conforming loan limit is a bit higher in higher-cost areas each year, so it is wise to check on this before looking for a mortgage if you are buying a higher-cost home.
8. Look for Loans That Fit Your Situation
When most people think of a mortgage, they think a 30-year fixed-rate loan. If you feel it's unlikely that you will be in the home for a long period, perhaps a different type of mortgage will fit your needs and offer a better rate.
An example is a 5-year adjustable-rate mortgage. This might work well if you are in a position where you tend to move every few years due to your job, or if you anticipate buying a different home in a few years to accommodate your growing family.
This might be an area where an experienced mortgage broker can help - they are trained to ask questions to help their clients find the best rate and best type of loan for their unique situation.
9. Ask Friends and Family
If you have friends or family members who have recently moved and obtained a mortgage, ask about their experience. Who did they use to get the mortgage? What type of rate did they get, what types of fees or extra costs were involved? While their situation might be different from yours, you still might learn something about another lender you hadn't considered, and you might gain some insights into aspects of the process that you hadn't previously considered.
10. Consider All Costs Involved
The overall cost of a mortgage is what is most important. A low-interest rate is a big part of that cost, but consider all costs associated with the loan. Lenders are required to provide an APR (annual percentage rate) for the loan. There is a standard formula for this calculation to allow you to compare mortgages from different lenders, as well as different types of mortgages.