Before you get serious about buying a home or refinancing a current mortgage, the first question you usually ask is, “I wonder what rates are like?” Mortgage interest rates have an impact on monthly payments, maximum loan amounts and the amount of interest paid over the life of a loan, so it pays to shop around for the most competitive terms.
Searching for the best deal can be a confusing process, yet there are things borrowers can do to help nail down the best rate.
Hunt, Don’t Fish for a Great Mortgage Interest Rate
Opening up the business section of any newspaper or logging onto any number of mortgage rate websites, you’re immediately hit with options. 30 year fixed rate, 15 or 20 year loans are available. Some with one discount point, some with none and some with two.
If not a fixed rate, what about an adjustable rate mortgage (ARM)? ARMs today offer the lowest interest rates of all loan programs. Yes, there’s the risk of adjustable rates going up in the future and only those who know they will sell or refinance in the next few years should get one. But rates area admittedly almost too low to believe. ARMs today are usually called “hybrid” ARMs, because they are fixed for a predetermined period of say three or five years before converting into a loan that adjusts every six or twelve months.
So how can you shop for a mortgage rate when there are so many options? The process can be overwhelming at first.
Before you begin your rate shopping journey, decide beforehand the mortgage program that’s right for you. You can discuss which program is in your best interest with your loan officer, but whatever program you choose, use that program to get your rate quote. Comparing a 15 year fixed rate loan at one lender with a 5/1 hybrid loan at another is simply a waste of time. Know ahead of time the loan you want and hunt, don’t fish for it.
Use the Same Interest Rate Scenario
Next, contact the lender and request a rate quote under the exact same circumstances. For instance, call the lender and say, “I’d like your best 30 year rate quote for a loan amount of $300,000 good for 30 days without any points. The sales price of the home is $375,000 and I have excellent credit. I will live in the property as my primary residence.”
By obtaining a rate quote in such a manner, you’ve isolated the different variables lenders use when issuing a quote. Don’t ask for their best 30 year fixed rate; ask for their best 30 year fixed rate using your specific scenario.
Compare Lender Fees, Not Third Party Fees
Once you get your interest rate quote, ask for the lender fees associated with the loan and not fees charged by others. There will be a host of third party charges you may ultimately have to pay, but the lender has no control over those items. When getting quotes from lenders, pay attention to the rate and lender fees only and pay no attention to third party charges like appraisal, title, and escrow.
Lenders have the ability to waive all or part of their fees but don’t expect them to offer to do so at the outset. Lenders need to be competitive in order to get your business but they must also charge additional loan fees to offset costs associated with processing and approving your mortgage application.
Lenders can also present you with a no-closing cost loan in most cases and can provide you with a rate quote with no fees whatsoever. Remember however, if you get a no-closing cost option quote from one lender, you need to contact the other lenders and get their quote under the exact same scenario.
How Many Quotes Should I Get?
At first glance, it might seem there are thousands of lenders just waiting to provide you with your home loan. From your bank down the street to sea of online lenders, all are in business to place mortgage loans. So how many quotes is enough?
At minimum, three quotes will give you an idea of what’s available in the current market but anytime you get more than five quotes it may be a bit redundant. The mortgage industry is hyper-competitive and lender rate and fee quotes will be very similar to one another. If you get a rate quote that is 2.00 percent lower than all other quotes, something is seriously out of whack.
When to Get a Quote
Mortgage rates are derived from specific indices. A 30 year fixed rate Fannie Mae loan is tied to the FNMA 30-yr Bond and a 15 year FHA loan is related to the GNMA 15 year bond, for example. These bonds are traded throughout the day and can rise and fall during the course of trading, affecting mortgage rates in the process.
That means rates can be higher at the end of the business day than in the morning. When you get interest rate quotes, get your quotes around the same time of day to avoid any wild rate swings the market may have experienced. While interest rate quotes you see on the Internet or the newspaper can provide you with a good idea on what rates are doing in general, only by contacting a lender and getting an up-to-the-minute quote can you be assured the rate quoted isn’t already yesterday’s news.
No one can guarantee you the absolute best rate on the planet. But if you follow the steps listed here, not only will you get up to the date quotes but you’ll know they’re legitimate quotes as well. Unless you tell a lender exactly what you need, neither you nor the lender can be sure you’re getting the rate that’s right for you.
So sit back, pour a cup of coffee and start making a few phone calls. You’ve got some rate hunting to do.