First, you'll need to contact a lender to get your credit scores. Craig March, a personal mortgage consultant with Inlanta Mortgage in Janesville, Wis., says you should share your credit scores with other lenders rather than letting each one you contact pull your credit history, because multiple inquiries could lower your scores.
"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 a lender can provide an accurate mortgage 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 ratio above 75% will pay a one-quarter percentage point 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 a percentage point.
Your plan for the best rates
No. 1: Establish a baseline. Get a referral from someone you trust and contact the recommended lender to obtain your credit scores and discuss your loan options. Your lender can help you compare Federal Housing Administration and conventional financing, as well as various loan terms, so you can make an informed decision on which loan program and terms 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 but not for 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: Decide 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 about the charges 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 variation in fees associated with a loan are one reason why you shouldn't comparison shop solely based on the best advertised interest rate. Sometimes a mortgage at a lower advertised rate can end up costing you more 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. Experiment with the options to find out if you should you wrap the closings cost into the loan amount, pay them in cash or choose a "no-cost" mortgage.
No. 5: Consider whether you should pay points. One of the largest expenses 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 the home for the long term, such as 10 years or more, you may want to pay points to keep your interest rate as low as possible for the life of the loan. If you plan to sell in a few years, paying a lot of cash upfront to pay points may not be worth it, says Richards. A lender can show you the difference in interest and monthly payments to help you decide whether worth it to pay points.
No. 6: Call lenders on the same day. Because mortgage rates fluctuate constantly, you should call lenders as close to the same time as possible on the same day to compare 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 have organized your financial information, follow the six steps above to ensure that you get the best mortgage rate available.
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