How to get the best rate on your home loan - from the desk of John Meussner
When shopping for a mortgage the first thing to do is make sure you are pre-qualified Once you know you can get a loan, the next most important thing for most people is their interest rate. Sometimes it seems like it takes a rocket scientist to figure out how to get the lowest possible rate, but with some basic knowledge, you'll be equipped to make sure your rate is as low as possible and effectively shop and decide on a lender & loan program.
Why is rate important? Rates may seem close amongst lenders, so why is it important to get the lowest rate? To illustrate the importance, let's look at a quick example -
On a 30 year fixed mortgage for $300,000 the difference of just .125 to interest rate equates to nearly $10,000 over the life of the loan! That's a lot of money that can be saved simply by following the 10 tips outlined below.
1) Shop around
This one might seem obvious, but many people don't know how to shop effectively, or are worried about having their credit pulled by too many lenders. For one, you only need your credit pulled once but make sure you get your credit scores. If you have your scores from one lender, you can just tell other lenders your scores and they'll be able to determine a rate. Different lenders have different rates for different reasons - shop around with 3-4 different lenders (use referrals from friends & family if possible - see 'be wary of advertisements', below) and determine who has the lowest rate. IMPORTANT TO REMEMBER - Rates change daily, sometimes several times throughout the day, so make sure you do your comparison shopping in as short a time as possible so you're getting an accurate comparison.
2) Improve your credit
Mortgage rates are based on risk. A higher credit score indicates a lower risk level to lenders and investors, so the rate of interest can be lower for those with a high FICO score. Generally, the top tier for most lenders is any credit score above 740, however some lenders offer incentives to borrowers for scores all the way up to 780-800. While that level might not be possible for everyone, getting as close as possible is important and will save you a ton!
3) Put more money down
If you can't optimize your credit score, it helps to put extra money down. Just like credit scores, rates vary in direct proportion to the equity in your home - so if you put 30% down, you'll generally get a better rate than if you put 20% down. GSE's that run the mortgage industry such as Fannie Mae and Freddie Mac use a system called 'Risk based pricing' which sets tiers based on a combination of credit score & equity position - so if you have a low credit score, you can compensate with a large down payment. Likewise, if you have a high credit score your interest rate won't suffer terribly from having a small down payment. You can ask your lender about different rates for different amounts down.
4) Be wary of advertisements
Unfortunately the vast majority of advertisements showing mortgage rates are at least misleading, at worst blatant false advertising. Usually a rate that is advertised is an absolute best case scenario and requires a borrower to meet standards that maybe 5% do. Advertised rates also oftentimes include fine print that shows what you would never guess from the rate - often times things like "Rates include 2 points, 15 day rate lock, 760 FICO score and $400,000 loan amount with 30% down". You're better off shopping around with a few reputable lenders to get an idea of what rates you'll qualify for.
5) Avoid big banks
This one surprises most people, but if you really think about it, it makes sense. The bigger the bank, the bigger the support staff, the bigger the advertising budget. the more overhead. Banks offset some of those costs with mortgage profits, which stem largely from higher interest rates. Oftentimes, large banks often have a longer process which requires a longer rate lock. The result? A higher interest rate. If the bank is 'too big to fail' it's also probably too big to offer a competitive interest rate. IMPORTANT TO REMEMBER - Sometimes banks are VERY competitive for certain products - banks do have the ability to focus on niche products and offer sub-market rates to get a large market share for a specific product. More often than not, however, you'll have better luck with mortgage bankers and mid-size companies that have both high volume and low overhead.
6) Look at different programs
Most home buyers and home owners look for a mortgage loan and take what they're offered which is normally a 30 year fixed rate loan. Inexperienced loan officers might sell a standard product when another, lower interest product may be a better fit. Business owners with large seasonal cash influxes, for example, can benefit from an adjustable rate mortgage (ARM) that they can pay down or off within a few years. Folks with some disposable income and a low enough debt/income ratio can look at shorter term loans which also offer lower interest rates. A 15 or 20 year fixed rate loan will have a lower rate than a 30 year fixed. Adjustable rate options are also a good option for some people, and generally offer a substantially lower interest rate than a fixed rate loan. IMPORTANT TO REMEMBER - ARM loans offer great rates but are NOT for everyone. It's always a good idea to consider all of a loan products features before making a decision. While rate is important, your financial future is more important. Find a mortgage program that fits your plans for the future!
7) Know your rate lock terms
Most people don't understand how rate locks work, but it's pretty simple. The shorter the rate lock period, the better the interest rate. If you gamble and float your loans interest rate you may be able to do a short lock and get a great rate. If you need a longer lock your rate could be higher. Many lenders have a standard rate lock period (30 or 45 days), but if you get all of your documents to them quickly, you may be able to shorten your lock term and obtain a better rate.
8) Don't hesitate
Especially when rates are falling, many people hesitate to pull the trigger on a rate lock. Everyone wants a lower rate, but the truth is you'll never know when rates are at their lowest until they start moving up. I've had countless clients that missed out on the lowest rate because they waited. If you're happy with your payment and you've done your shopping, lock in before rates head up! In today's market, rates can rise and fall quickly and drastically so it's important to work with a lender you trust and a loan officer that follows the marketplace closely.
While your lender should always be giving you the lowest possible interest rate, sometimes there is a small window of flexibility. It could also start a conversation about different products which might be a good fit and come with a lower rate. It never hurts to ask.
10) Call John!
Compare our rates to our competition and you'll see we usually come out on top! If you'd like a rate quote feel free to call 484-680-4852 or use the quick quote tool on our homepage at jmloans.com!
Author: John J Meussner