Buying a house has always been complicated, but the recent U.S. tax overhaul adds another wrinkle to the process: By summer 2019 house prices may be 4% lower than they would have been originally, but a lot of homeowner-friendly tax deductions will dissappear. It’s never been more important to find the most favorable mortgage rate.
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. Use the tool below to help you find the best mortgage rate for you.
Mortgage Rate Comparison Tool
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 business 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 $1,370 a month on a $300,000 home loan in North Carolina with a credit score higher than 760. My interest rate would be just over 3.6%. With a score of about 680, I’d be paying $1,438 a month at an interest rate of approximately 4.03%. And with a score of 620, I could be spending as much as $1,653 a month at an interest rate of more than 5.2%. With the lower credit score, I’d be paying $102,100 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 Nashville, Tennessee (20%), I’d pay as little as $730 a month in mortgage payments, according to this Bank of America calculator. This assumes a 4.05% APR, solid credit, and a fixed 30-year loan. If I could scrape together only $25,000 (12%), I’d suddenly be paying $823 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 $883.
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 (FRM) 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 are closing costs?
With any loan, the moment you complete the process and recieve your money is known as “closing”, or “settling.” When you close a loan, there are additional fees charged by the lender and any other parties involved to finalize the process. These are known as “closing costs.”
Mortgages are complex, with multiple parties involved. As a result, closing costs of your mortgage are likely to cost thousands of dollars. But they’re a necessary step in receiving the financing for your house.
Here are some of the possible fees that go into closing costs:
- Prepaid interest
- Title deed transfer fees
- Real estate agent fees
- Property surveys/appraisal costs
- Homeowners association fees
- Legal fees
- Fees for purchasing interest points to lower your rate
Can I lower my closing costs?
Yes. Luckily, there are ways to lower your closing costs.
Some solutions, such as hiring an attorney, might end up costing you more in the long run. But others won’t come with any cost at all:
- Shop around: Even if you have average to poor credit, you need to do your homework before selecting a lender. Some may offer low closing costs, as well as more favorable rates.
- Close near the end of the month: You prepay interest from the day you close to the end of the current month. Closing on April 27 means you prepay interest for three days, while closing on April 15 means you’ll prepay for 15.
- Know your fees: Mortgage lenders may pad their loans with a number of unnecessary fees, which can cost hundreds of dollars.
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.)
The Freddie Mac Primary Mortgage Survey says we closed out 2017 with an average rate for a 30-year mortgage at 3.99. That’s a considerable drop from the average rate around this time last year (4.32% during December 2016) and great news for home buyers. (For the record, Zillow® Mortgage shows a current average of approximately 3.7% 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 tend to be more complicated than your average personal loan. And mortgage lenders tend to be more sensitive to changes in the marketplace. If you’re currently in the market for a mortgage or mortgage refinance, be aware of two major factors that tend to affect mortgage rates.
Your mortgage doesn’t necessarily stay with the same organization you signed with. Instead, the bank, credit union, or lender you signed with often sells your mortgage to third-party investors. These investors are typically known as aggregators.
Aggregators often lump individual mortgages together into what are called mortgage-backed-securities (MBS). (One major factor in the financial crisis of 2008 was an overwhelming number of subprime, or bad credit, securities.)
Mortgages with higher interest will often result in higher returns for investors. So, while homebuyers favor mortgages with lower interest, aggregators favor mortgages with higher interest. That conflict is a major factor in determining mortgage interest rates.
Inflation and interest rates have a direct relationship. The higher the rate of inflation, the higher interest rates will be. This is because the Federal Reserve wants to continue stimulating the economy’s growth, while slowing the rate of inflation.
If the Fed increases interest rates because of inflation, mortgage rates increase as well. But even just a prediction that interest rates will increase can cause an increase in mortgage rates.
So, when you’re shopping for your mortgage, do your homework. Don’t just check with multiple lenders, but also keep an eye on the mortgage market and the current state of the economy. It’ll help in the long run.
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.
What is escrow, and will it affect my mortgage?
Monthly mortgage payments go to four costs:
When borrowers take out a mortgage, lenders often require they pay into an escrow account. Lenders control the escrow account, and pay property taxes and homeowners insurance on the borrower’s behalf. Each month, borrowers pay down principal and interest, while contributing to the escrow account.
If you place a down payment of 20% or more, your lender may choose to waive the escrow account. If they do, you can choose to pay your taxes and insurance yourself. Your lender may offer a lower interest rate if you choose to establish an escrow account.
Other lenders may require you to pay into an escrow account, which may or may not affect your interest rate. If your lender requires an escrow, they must follow the Department of Housing and Urban Development’s rules on maintaining escrow accounts.
An escrow may not affect your interest rate, and will not change the type of mortgage. Tax and insurance rates are variable. It is possible the amount you pay into escrow can change from month to month, even if you have a fixed-rate mortgage.
If you are unable to make a down payment of at least 20%, lenders may add private mortgage insurance (see “What is private mortgage insurance?” below) to your escrow payments.
Your location also affects monthly escrow payments. If you live in an area prone to flooding or fires, for example, your insurance payments may be higher. Your escrow will increase as a result.
How can I get pre-approved for a mortgage?
When you’re pre-approved for a mortgage or other home loan, it means a potential lender or underwriter has looked at your financial history and they’re confident in your ability to repay the loan.
Typically, lenders examine your credit score, current debt vs. income, pay stubs, and tax history, but the process always varies from lender to lender.
How can I prepare?
In order to have the best chance at pre-approval, as well as the most favorable rates, you need to have and maintain a good to excellent credit score. Always be sure to pay your bills on time and consistently, and never borrow more money than you need.
Additionally, lending advisors or brokers will ask for some basic financial information, including about your savings, debts, employment history, etc. Be sure to have all that information handy.
What’s the process like?
There are generally three steps when it comes to mortgage preapproval: Prequalification, pre-approval, and commitment.
- Prequalification: During prequalification, a potential lender assesses your financial history and determines what loans you might qualify for — this is in no way a commitment for either party.
- Pre-approval: In pre-approval, things get a bit more serious. Lenders are actively underwriting your finances to determine the exact type of mortgage they’re willing to offer. Here, you’re required to provide tax returns, pay stubs, and allow a hard pull on your credit report.
- Closing: By this point, your banker, broker, or credit union will have made an official offer. It’s up to you whether or not you want to proceed.
We do recommend shopping around — but with no more than three mortgage lenders. Because the pre-approval process requires a hard credit pull, as opposed to a soft pull, your score is likely to drop.
What is private mortgage insurance?
Private mortgage insurance (PMI) is a type of insurance designed to cover the lender should you default on your mortgage. You may have to pay PMI if you take out a conventional mortgage and make a down payment of less than 20%. You may also have to pay PMI if you refinance with less than 20% equity in your home.
PMI generally costs between 0.5% to 1% of your mortgage per year. You can pay a monthly premium, pay a one-time premium upfront at closing, or pay with a combination of the two. At first glance, 0.5% to 1% of your mortgage doesn’t sound like a lot. But assume an average mortgage of $250,000:
And that’s in addition to your monthly mortgage payments.
The good news is that you can remove PMI once you build up enough equity. When you have paid down the mortgage balance to 80% of your home’s original appraised value, you can submit a written request asking your lender to cancel PMI coverage. Once the balance reaches 78%, mortgage lenders and servicers are required to cancel.
If you’re unable to make that 20% down payment but still want to purchase a home without paying PMI, there is an alternative.
A piggyback mortgage is also known as an 80-10-10 mortgage.It involves taking out one mortgage for 80% of the home’s value and piggyback another for 10% of the home’s value. The result leaves you with a 10% down payment on your original mortgage.
Bear in mind that the piggyback mortgage strategy has drawbacks and risks. For example, taking out two mortgages means paying closing costs twice. Also, you’ll likely pay a higher interest rate on the second mortgage.
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.
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.