Buying a house is always tough, but it’s a lot tougher without the right loan. Thankfully, the best mortgage rates in 2017 are still at or near historic lows. It’s never been a better time to dive into homeownership.
Here’s how to find the best mortgage rate
Multiple factors affect your mortgage rate, including the mortgage type, your credit score, and your down payment. And if you’re using a real estate agent, you’ll likely be directed to a handful of preferred lenders, regardless of whether the rates are competitive.
That’s why it pays to comparison shop as much as possible. Here’s a couple of tools to help you get started in your search for the best mortgage rate in your state:
Mortgage Rate Comparison Tool
Featured Mortgage Company
Don’t forget about mortgage disclosure rules
Lenders are required by law to provide a Good Faith Estimate — a document that outlines your potential loan’s terms and costs — within three days of your loan application. Use this estimate to make a better apples-to-apples comparison of your options.
More tips to help you score the lowest mortgage rate
Polish your credit score
It’s simple: Your credit score tells lenders how responsible you are, so the higher your score, the better your chances of securing the cheapest mortgage rate. Raising your credit score takes time, but the benefits to your financial health can be enormous — especially your ability to find the best mortgage rate.
For example, according to the rate calculator at myFICO, I could pay as little as $1,361 a month on a $300,000 home loan in North Carolina with a credit score higher than 760. My interest rate would be just under 3.5%. With a score of about 680, I’d be paying $1,429 a month at an interest rate of approximately 3.97%. And with a score of 620, I could be spending as much as $1,641 a month at an interest rate of more than 5.1%. With the lower credit score, I’d be paying $101,042 more in interest over the life of the loan.
Beef up your down payment
Saving up for a 20% down payment (that’s what we recommend) can be painfully tiring, but it’s one of the most impactful ways to get the lowest mortgage rate and save you a lot of money down the road. Plus, if you put down enough, you won’t have to pay mortgage insurance.
If I put $40,000 down on a $200,000 home in Tennessee (20%), I’d pay as little as $730 a month in mortgage payments, according to this Bank of America calculator. This assumes a 3.7% APR, solid credit, and a fixed 30-year loan. If I could scrape together only $25,000, I’d suddenly be paying $798 a month. And then there’s $70 a month in mortgage insurance, which I’d have to pay since I couldn’t put 20% down. That brings my monthly payments to just under $870.
Consider how long you’ll be in your house
If you don’t plan on living in your new home for more than a few years, adjustable-rate mortgages might make more sense. Adjustable-rate mortgages (ARMs) have low initial interest rates that increase significantly after a specified period. Many homeowners have been able to take advantage of those low rates by selling their homes before rates increased.
If ARMs seem like too much of a risk to you, look seriously at a shorter-term fixed rate mortgage. Your monthly payments will be bigger, but you will score a much lower interest rate, pay much less over the life of the loan, and build equity much faster.
Finding the best mortgage lenders
Here are three tips that will help you find lenders not only with the best home loan rates; but those with seamless customer support too.
Do your homework
Reading through comments sections isn’t a bad idea, but you should probably take those experiences with a grain of salt. We recommend balancing out your research with insight from a recognized leader like J.D. Power and Associates. Its 2017 annual mortgage lender customer-satisfaction survey found Quicken Loans had the most satisfied customers, followed closely by other industry heavyweights like USAA, Capital One, BB&T, and U.S. Bank.
Ask friends and family about their experiences
Local lenders might not have a helpful presence on the web, so asking around can be crucial in helping you find the best mortgage companies in your area. Conduct a quick survey of your family and friends, primarily if they’ve recently purchased or refinanced a home. Ask whether they felt they understood the lending process and whether their agent was responsive and courteous.
Take note of how you’re initially treated
Your mortgage might be the most significant financial transaction of your life, and you should feel comfortable with your lender. If you call for information and don’t receive it quickly, consider that a red flag. Any lender who is unwilling or unable to answer your questions — or acts like it’s an inconvenience to do so — will probably be less than pleasant to deal with further down the line.
Common types of mortgages
A fixed-rate mortgage with a 20% down payment isn’t the only way to finance a home purchase. Before you pull the trigger, consider a few of the most common types of mortgages and determine which one could offer you the most benefit.
What is a fixed-rate mortgage?
A fixed-rate mortgage is the most common type of home loan. One of the main benefits is that even though the proportion of principal versus interest on your bill will change over the course of the loan, you’ll still pay the same amount every month. Your interest rate is locked in when you close on the loan, so you aren’t vulnerable to sudden increases in interest rates.
Of course, while you aren’t vulnerable to interest-rate increases, you’ll lose out if rates decline — you’ll be stuck paying the higher rate. It can also be harder to qualify for a fixed-rate mortgage if your credit score is less than stellar. Down payments are typically high, too, with most lenders requiring 20% of the loan to avoid pricey mortgage insurance.
Fixed-rate mortgages are offered for 10-, 15- or 30-year terms, with the latter being the most popular choice. Longer terms mean lower payments, but they also mean it will take longer to build equity in your home. You’ll also pay more interest over the life of the loan.
What is an adjustable-rate mortgage?
ARMs make buying a home more accessible by offering lower down payments, lower initial interest rates, and lower initial payments. The interest rate remains constant for a certain period of time — generally, the shorter the period, the better the rate — then rises and falls periodically according to a financial index.
The main downside is obvious: If your ARM begins to adjust when interest rates are climbing, your escalating payments could start to squeeze your budget. It can also make annual budgeting tricky, and if you want to refinance with a fixed-rate loan, the cost can be quite steep. Ultimately, with an ARM, you’re accepting some of the risk that your mortgage lender would absorb with a fixed-rate loan.
There are several kinds of ARMs. One-year ARMs typically offer the best mortgage rates, but they’re also the riskiest because your interest rate adjusts every year. At slightly higher rates, hybrid ARMs offer an extended initial fixed-rate period. Common hybrid loans include 5/1 mortgages, which offer a fixed rate for five years and then and an annually adjustable rate for the next 25 years.
What is an FHA loan?
FHA (Federal Housing Administration) loans are government-backed mortgages that require much smaller down payments than their conventional counterparts. In fact, you may qualify for an FHA loan with as little as 3.5% down, but you’ll likely be on the hook for mortgage insurance each month in order to help the lender blunt some of the risk. These loans are ideal for those who can’t afford a huge down payment, but have a steady income.
What is an VA loan?
VA (Department of Veterans Affairs) loans are also government-backed mortgages available with low (or even no) down-payment options, minus the mortgage insurance required on FHA loans. However, the VA typically charges a one-time funding fee that varies according to down payment. You must have a military affiliation to get a loan — active-duty members, veterans, guard members, reservists, and certain spouses may qualify.
What is an interest-only mortgage?
Technically, interest-only mortgages are a type of ARM that allows home buyers to pay only interest for a certain period at the beginning of the loan, keeping payments as low as possible. They can be a good choice for someone who expects a significant increase in income in the future.
If this sounds like a sweet deal, it’s because interest-only mortgages come with tremendous risk.
The payment is lower initially because you are only paying interest, and not principal. Once the interest-only payment period is up, your payment will jump when you begin to pay the principal of the loan. Plus, you can experience a rate increase. With these risks, you’ll probably want to steer clear of interest-only mortgages as your primary option.
What is a balloon mortgage?
Balloon mortgages offer low, fixed interest rates for a short term — typically five to 10 years. In fact, you may only pay the interest on the loan for that time.
The catch? The remainder of the loan, likely a very significant sum, is due when the term is up. If your home has declined in value or you’re deemed uncreditworthy, you might be out of luck — and at risk of foreclosure. For this reason, balloon mortgages are rarely the best option for finding the lowest mortgage rate and should be avoided except in special cases.
What is a good interest rate for a mortgage?
The Freddie Mac Primary Mortgage Survey says the average rate for a 30-year mortgage in 2017 is 3.94%. That’s incredibly close to the historically low rates the economy experienced in 2012 (3.87%) and great news for home buyers. (For the record, Zillow® Mortgages shows an average of 3.61% for 30-year FRMs.)
If you have an average credit score, you probably shouldn’t consider any rate above 5%. And if your credit score is excellent, you might be able to score rates as low as 2.5%.
How does your credit score affect your mortgage?
Your credit score is the metric lenders use to determine your ability to pay on your loan. If your credit score is lower than average (generally 600 and below), you won’t score as good of a mortgage rate as someone with excellent credit.
There are two primary types of credit scores: FICO and VantageScore. Their ranges vary slightly, but a credit score of 700 or above is considered good for both. Check out our guide for several smart ways to improve your credit score, which can also help you secure the lowest mortgage rate.
How are mortgage rates set?
Mortgages are complicated. There are a number of factors that go into determining your rate, the most obvious being location and the type of property itself — a bigger home in a nicer neighborhood will cost more than the opposite.
Some you can control, and some you can’t. However, there are a number of ways to use each factor to your advantage, in order to get the lowest mortgage rate possible:
How will my credit affect my mortgage rate?
There’s a direct connection between credit score and mortgage rate: The higher your credit score, the lower your mortgage rate could potentially be.
But mortgages are also negotiable. Since your credit score is proof that you’re able to pay back your debts, more lenders will be willing to give you lower rates. I recommend looking at potential rates from three to five different lenders.
Once you’ve narrowed it down, you can bring a competitor’s score to the negotiation table in order to get a better rate.
And, according to FICO, most credit scores aren’t affected by multiple loan or mortgage inquiries, so long as it’s within a short period of time.
What is a lock period, and how will it affect my mortgage rate?
A mortgage rate lock period is an agreement between lender and borrower to prevent an interest rate from going up or down during a predetermined amount of time.
Usually, mortgage lock periods (also known as mortgage lock-ins) are designed to protect both lender and borrower from fluctuations in the economy while the mortgage is processed.
Often, lock-ins only last for about 30 to 60 days. Once that period is up, you can ask the lender to extend the lock, but there are a few downsides: Locks tend to come with a 1-point increase in your rate, and there can be additional “lock fees.” The longer the lock, the higher the fee will be.
But if you’re looking to avoid last-minute budget issues, or lock a refinancing loan, a lock period can be a powerful tool in your arsenal.
Different types of mortgage lenders
While you’re looking for the best possible mortgage rate and mortgage type, take into consideration the different types of mortgage lenders on the marketplace today. While you shouldn’t find anything drastically different between lenders, the details are still important. We’ve narrowed mortgage lenders into three categories:
This category includes mortgage bankers that work for the major banking institutions (Bank of America, Wells Fargo, etc.). Mortgage bankers can provide direct links between lenders and the organizations that provide the capital for their mortgage.
There’s more security in using a mortgage banker, and if you’ve already got a good history with the bank, you might be able to obtain a lower interest rate than on the marketplace.
Mortgage brokers are essentially middlemen between borrowers and the lending industry. Using a broker means that you’ll have much more accessibility to competitive repayment periods and interest rates outside of specific financial institutions.
Brokers can give borrowers access to banks that you may have a relationship with, but offer lower rates. Today, mortgage brokers have grown into niche organizations, such as Quicken Loans or LendingTree, that keep a steady handle on the fluctuating housing marketplace.
Credit unions are essentially banking institutions brought back to the basics — and their mortgages reflect that. Mortgage rates through a credit union tend to offer lower rates than either bankers or brokers. (This is because credit unions are owned by account holders, as opposed to separate investors.)
Credit unions can be an appealing choice for anyone looking to find a mortgage with average to bad credit. They tend to operate as nonprofits and tend to keep loans in-house as opposed to utilizing third parties.
Find the best mortgage rate for you
No matter what type of mortgage you’re considering, comparison shopping is the only way you’ll find the best mortgage rates for you. Now that you know more about how to find the best home loan rates, you can put that knowledge to work by trying the rate comparison tool again.