U.S. mortgage rates have risen in the aftermath of the presidential election and latest Federal Reserve increase as potential homeowners face higher monthly payments amid a stagnant economy with slow wage growth.
But, how do you snag the absolute lowest rates for a traditional 30-year fixed rate mortgage, especially if you are a first-time homebuyer?
How to Get a Low Rate
Low mortgage rates can play a large factor in homeowners being able to save tens of thousands of dollars in interest. Even a 1% difference in the mortgage rate can save a homeowner $40,000 over 30 years for a mortgage valued at $200,000. Having a top notch credit score plays a critical factor in determining what interest rate lenders will offer consumers, but other issues such as the amount of your down payment also impact it.
A high credit score is the key to ensuring that borrowers receive a low mortgage rate. Here's a quick rundown of what the numbers mean - a score of anything below 620 ranks as poor, 620 to 699 is fair, 700 to 749 is good and anything over 750 is excellent. Think carefully before canceling a credit card with a long, positive history, but decrease your debt. One of the biggest factors which impacts your credit score is your credit utilization rate.
Borrowers who have higher credit scores have an "advantage when it comes to saving the most on interest rates and other mortgage fees," said Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C-based non-profit organization.
"Finding the most affordable home means shopping competitively for the best mortgage terms," he said.
Many potential homeowners focus only on the interest rate or the monthly payment. The APR or annual percentage rate gives you a better idea of the true cost of borrowing money, which includes all the fees and points for the loan.
Borrowers with the best credit have an advantage when it comes to saving the most on interest rates and other mortgage fees, said Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C-based non-profit organization.
Finding the most affordable home means shopping competitively for the best mortgage terms. Interest rates can vary depending on how each mortgage structured. For example, 30-year mortgages are currently average about a percentage higher than 15-year loans.
In highly competitive housing markets where the seller has an advantage, buyers may not have as much negotiating power when it comes to the purchase price and closing costs. The reverse is true in areas with a surplus of homes for sale.
The origination fee or points is charged by a lender to process a loan. This fee shows up on your good faith estimate (GFE) as one item called the origination charge. However, the origination fee can be made up of a few different fees such as: processing fees, underwriting fees and an origination charge.
Homeowners who are able to afford a 20% down payment do not have to pay private mortgage insurance (PMI), which costs another 0.5% to 1.0% and can tack on more money each month. Having at least 20% in equity shows lenders that there is a lower chance of the individual defaulting on the loan.
Why 30-Year Mortgages Remain Good Choice
The 30-year fixed rate mortgage is a good option for many homeowners because it represents permanent payment affordability since the principal and interest portion of the monthly payment never changes, said Greg McBride, chief financial analyst for Bankrate, a New York-based financial data and content company.
"Mortgage rates are at the lowest levels since mid-January, unemployment is falling and consumer confidence is rising," he said. "This is the sweet spot for prospective home buyers."
Younger homeowners should consider how long they plan to live in their home due to potential lifestyle or career changes. The current data demonstrates that the majority of homeowners who obtain 30-year mortgages live in the home for an average of seven years and tend to refinance or sell during that period, said Marc Stefanski, CEO of Cleveland-based Third Federal Savings and Loan (TFSL).
"A 30-year fixed rate purchase loan still represents good value today for a borrower, but it doesn't always make the best financial sense depending on the length the borrower stays in the mortgage," he said.
Some potential homeowners should consider obtaining an adjustable rate mortgage because they could save thousands of dollars on interest payments. A 5/1 ARM, which resets its interest rate after five years is 2.79%, compared to a 30-year mortgage which is 4.09%.
"That is a 130 basis point difference," said Stefanski. "For a home purchased at $239,500, that comes out to nearly $9,000 in savings over the first five years with the ARM loan. The 30-year fixed loan still represents value relative to interest rates 10 years ago, but the ARM is actually the best value based on the average length of a 30-year fixed rate loan."
Here are the top five lowest rates for a 30-year mortgages, according to RateWatch, a Fort Atkinson, Wis.-based premier banking data and analytics service owned by TheStreet, Inc., which surveyed the majority of institutions in the U.S. from March 27 to April 3.
The Midwest Bank is headquartered in Detroit Lakes, Minn. and offers a rate of 3.875%.
Huntington Federal Savings Bank is headquartered in Huntington, W. Va. and offers a rate of 3.875%.
The Bank of North Carolina is headquartered in Thomasville, N.C. and offers a rate of 3.75%.
Andrews Federal Credit Union is headquartered in Suitland, Md. and offers a rate of 3.625%.
Members Cooperative Credit Union is headquartered in Cloquet, Minn. and offers a rate of 3.625%.