If you're in the market for mortgage, chances are you've been instructed to shop around for the best mortgage rates. But just because you've been told to shop around doesn't mean you know how.
First, you'll need to contact one lender to get your credit score. Craig March, a personal mortgage consultant with Inlanta Mortgage in Janesville, Wisc., says you should share your credit score with other lenders rather than letting each one you contact pull your credit because having too many inquiries could lower your score.
"There are so many different credit score models that the score you see as a consumer may not be the same as the one a mortgage lender sees, so it's important to get your score from a lender," says Mark Richards, a senior mortgage loan officer for TD Bank in Washington, D.C.
Brian Martucci, a mortgage lender with GetLoans.com in Washington, D.C., says every borrower must be prepared to answer the following questions before lenders can provide an accurate rate quote:
- How large is your down payment? Interest rates vary according to your loan-to-value ratio
- Are you buying a single family home or a condominium? Martucci says a borrower purchasing a condominium with a loan to value above 75 percent will pay a one-quarter percent higher interest rate.
- Are you refinancing or purchasing? Interest rates may be higher on a refinance, especially if you are taking out cash, which could raise your rate by one-eighth of one percent.
- If you intend to waive escrow and pay your taxes and insurance yourself, your mortgage rate could be one-eighth of one percent higher because that's considered a riskier loan, says Martucci.
6 steps to shopping for the best mortgage rates
No. 1: Establish a baseline. Get a referral from someone you trust and contact that lender to obtain your credit score and discuss your loan options. Your first lender can help you compare FHA and conventional financing, as well as various loan terms so you can make an informed decision on which loan program and term you want before you contact other lenders.
No. 2: Contact a mix of financial institutions. Interest rates fluctuate constantly for a variety of reasons, including the occasional promotion of a particular loan product by a financial institution. For example, some lenders who are eager to generate more purchase loans might offer the best mortgage rates for homebuyers rather than refinancing homeowners, says Martucci. Sometimes a credit union or bank will introduce a new loan product and offer better mortgage rates in order to entice borrowers, says March.
"It's best to diversify and try a mix of places such as a direct lender, a regional bank, a credit union, a community bank and a national bank," says March.
No. 3: Know when you want to close. The length of your lock-in period will impact your mortgage rate, so discuss your target close date with each lender and ask what they charge for different loan-lock periods.
"Make sure you tell the lender when you expect the closing to be, because you want to lock-in the interest rate for the right length of time," says Richards. "Many lenders charge one-eighth percent more if you must lock-in the loan for 60 days. If you need a 90-day loan lock your interest rate could be as much as one-third percent higher."
No. 4: Ask about fees. The various fees associated with a loan are one reason why you shouldn't comparison shop solely based on the best advertised rate. Sometimes an advertised rate can be lower than all the rest because of all the fees associated with it.
"Some lenders blend all their fees into a loan preparation fee, while others separate them out, so be sure to ask for the total amount it will cost to close the loan," says Martucci.
Generally, a mortgage with higher fees should have a lower interest rate, says March.
If you're refinancing, use HSH.com's Tri-Refi Refinance Calculator to compare your options for paying closing costs. Should you wrap the closings cost into the loan amount, pay them in cash or choose a "no-cost" mortgage?
No. 5: Should you pay points? One of the largest fees by far can be the points attached to a particular loan. Each point is equal to one percent of your loan amount.
"You need to make sure you discuss with each lender how the loan will be structured in terms of whether you are paying points or not," says March.
If you intend to stay in your home for the long term, such as 10 years or more, you may want to pay points in order to keep your interest rate as low as possible for the life of your loan. If you plan to sell in a few years, paying a lot of cash up front to pay points may not be worth it, says Richards. A lender can show you the difference in interest and monthly payments in order to decide whether or not it's worth it to pay points.
No. 6: Call lenders on the same day. Mortgage rates fluctuate constantly, so you should call lenders as close to the same time as possible on the same day to compare the best mortgage rates, says Martucci.
"If possible, call within the same timeframe, because a bond rally could mean that mortgage rates have dropped dramatically from the morning to the afternoon," he says.
After you organized your financial information and decide which loan is best for you, follow these six steps to make sure you find the best mortgage rate available.
Michele Lerner, author of "HOMEBUYING: Tough Times, First Time, Any Time", has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT's REIT magazine and numerous Realtor associations.