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Buying a home? 15 ways to shop for the lowest mortgage rates

lowest-mortgage-ratesWhen purchasing a home, shopping for the lowest mortgage rates is an essential strategy that can save you thousands of dollars over the life of the loan.

For the best results, shop with a plan. Do enough upfront research to have an idea of what you want, then see who can get it for you.

Here are some strategies to shop for, and qualify for, the best mortgage rates:

No. 1: Establish a baseline

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: Raise your credit score

Raise your credit score

Conventional lenders charge a higher interest rate for lower credit scores. Raising your score can help you qualify for lower rates.

Most lenders require a minimum credit score of 620 to 640. "Typically, a credit score of 740 or higher puts borrowers in the best tier for a conventional loan program," says Michael Smith, first vice president – business development manager for mortgage lending for California Bank and Trust in San Diego.

How much can a great credit score improve your interest rate?

"Depending on market pricing, you can shave one-eighth to one-quarter percent off your interest rate if you can get your credit score above 740," says Amy Tierce, regional vice president for Wintrust Mortgage in Needham, Massachusetts. Tierce recommends working with a lender who can use a credit score simulator to advise you on what steps to take to improve your score, although she says this can take 30 to 90 days or longer depending on your circumstances.

No. 3: Decide how long you'll keep the loan


This is important because it can change the kind of mortgage you choose. For example, if you are risk-averse you might choose a fixed-rate home loan for maximum safety. But in fact, if the property will only be kept for a few years, you can be perfectly safe with a 5/1 hybrid mortgage -- and pay about 1 percent less in interest. On a $400,000 mortgage, that difference in the interest rate is over $250 a month!

Indeed, shorter loan terms can get you a lower rate. While the spread between mortgage rates for loan terms vary, Tierce says that generally, 20-year fixed mortgage rates are about one-eighth percent lower than interest rates for a 30-year fixed, and 15-year fixed-rate loans are one-quarter to three-eighths percent lower than 30-year fixed-rate loans.

"You can save thousands on interest payments with a shorter loan term, although you have to make sure you can handle the higher payments," says Mark Fowler, executive vice president of business development at The Futures Company in Chapel Hill, North Carolina.

No. 4: Contact a mix of financial institutions

Calling Lenders

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 Brian Martucci, a mortgage lender with GetLoans.com in Washington, D.C. Sometimes a credit union or bank will introduce a new loan product and offer better mortgage rates in order to entice borrowers, says Craig March, a branch manager with Inlanta Mortgage in Janesville, Wisconsin.

"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. 5: Make a larger down payment

Larger Down Payment

The larger your down payment, the deeper your initial equity stake, thus the less risk you pose to the lender.

No. 6: Purchasing a single-family home

Single family home

Condominiums are considered a riskier investment because they dropped in value more than other types of homes during the housing crisis, says Tierce, so mortgage rates are usually one-eighth percent higher than for a single-family home. However, if you make a down payment of at least 25 percent, that interest rate add-on will not be charged.

No. 7: Be prepared to answer some questions

Answer questions

Martucci 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 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.
  • Do you intend to waive escrow and pay your taxes and insurance yourself? If so, your mortgage rate could be one-eighth of one percent higher because that's considered a riskier loan, says Martucci.

No. 8: Do your own research


You can shop in person, by phone, or online with mortgage lenders. What you don't want to do is just mindlessly go with whatever lender your real estate agent recommends -- even if you like that person -- you still owe it to yourself to compare interest rates and negotiate your best deal.

No. 9: Ask about fees

Mortgage 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.

No. 10: Always provide the same information

Provide consistent information

Make sure when you request a rate quote that you provide all lenders with the same information:

  • The quality of your credit
  • The location, type, and use of your property
  • Size of your down payment or the amount of home equity you have

Keep in mind that mortgage rates change often, so quotes obtained today can't be reliably compared against quotes given tomorrow.

No. 11: Call lenders on the same day

Call lenders on the same dayMortgage 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.

No. 12: Interview lenders and decide

Interview lenders

Contact the mortgage lenders and notice who gets back to you right away. Pay attention to who asks you questions about your situation, and who answers your questions in an understandable and meaningful way. See who you feel most comfortable with when discussing your financial concerns. At this point, you already know their mortgage rates are competitive, so trust your gut and go with the person you feel best about.

No. 13: Don't comparison shop by APR

APR Comparison

There are lots of ways to shop for a mortgage, but comparison shopping by APR (Annual Percentage Rate) is among the worst of them.

It's a government-mandated figure meant to show the "true cost" of financing a home over a period of 30 years. However, "true cost" is really equal to your loan size plus the interest paid over 30 years (assuming you're getting a 30-year, fixed-rate mortgage), plus closing costs required for the loan.

No. 14: Know when you want to close

Close on your mortgage

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 Mark Richards, a senior mortgage loan officer for Citizens One Home Loans in Washington, D.C. "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. 15: Decide if you'll pay points

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.

"Depending on the lender, paying one point will reduce your mortgage rate by one-quarter percent," says Richards. "On a $200,000 loan, you'd pay $4,000 to bring down your rate 0.5 percent. You'd only save around $4,000 in the first 10 to 11 years, but you'd save $40,000 over the life of the loan with that lower rate."

You can also use HSH.com's Closing Cost Calculator to figure out if paying points is worth it.

Shopping for the best mortgage rates and the best overall mortgage for you and your financial situation is not an easy task, but these 15 tips should help steer you in the right direction.

Annika Larson May 18, 2017 2:07 am

My husband and I are looking to buy our first house. We will be needing a loan and want to make sure we get a fair mortgage rate. Thanks for the tip on calling lenders the same day to allow for a fair comparison without the influence of rate fluctuation.

Jasper Whiteside October 18, 2016 5:56 pm

I love your advice to avoid comparison shopping with APR. After shopping for cars, I found that the final price was always lower than the suggested retail price, therefore it wasn't really accurate. I hear a lot of talk in the housing industry about market value, meaning finding nearby houses that are similar and comparing what their prices are.

Samatha September 27, 2016 6:46 am

These tips are great. Keep them coming

Jen Pack September 8, 2016 6:30 pm

My husband and I are ready to buy our first home, so I really appreciate these tips on how to find the best mortgage. I like the tip you give of being prepared by knowing questions you will be asked and knowing how to answer them. I also agree that it is good to contact a mix of financial institutions, but I imagine that it would be beneficial to find one mortgage company that we like and trust and to stick with them.

April Cook August 11, 2016 4:21 pm

I want to buy a home, but I don't really understand how I can afford it or how mortgages work. I like that with shorter loan terms you can have lower interest. If I start with that but then can't make the payments can I switch it to a longer length with lower payments? I wouldn't want to get stuck with high payments and no way to make them.

Lillian Schaeffer August 3, 2016 7:50 pm

This is some great information, and I appreciate our point that a larger down payment will result in a lower mortgage. My husband and I have been saving up, and we're starting to discuss the possibility of moving out of our apartment and into our first home. We'll definitely continue to save, and we'll make sure to pay the largest down payment we comfortably can so our mortgage isn't as difficult to pay off. Thanks for the great post!

Los Angeles luxury real estate July 6, 2016 6:17 am

Interesting article! These points are really very helpful. Thanks for providing the information about the best mortgage rates. Keep sharing such amazing articles.

nybuyer March 7, 2016 8:40 pm

Can't agree more with the advice here. Do your due diligence and shop for mortgage. It will save you some money. Go to a bank, broker and loan aggregators. They can offer good rates and downpayment options. Best luck with house hunting!

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