So you’re ready to buy or refinance a home, but not sure which mortgage lender has the best option for you? Even if you choose to receive quotes from various mortgage lenders online, you should make sure to check with local mortgage providers. Big names don’t always mean big savings. When you’re ready to compare mortgage rates make sure you use these five tips to land the best mortgage rate. Here’s what to look for:
Adjustable Mortgage Rate
Adjustable rate mortgages provide an introductory fixed-rate term and convert to adjustable rate mortgages after that introductory period expires. Introductory rates on adjustable rate mortgages are typically lower than market rates for fixed rate mortgages, although the interest rate can vary when the adjustable rate mortgage becomes adjustable. When your mortgage becomes adjustable and by how much is becomes adjustable is determined by the adjustment period, the financial index used to calculate the interest rate adjustments and the margin used by your lender.
Adjustable rate mortgages are generally advertised as 1/1, 3/1, 5/1 or 7/1. The first number represents how many years the introductory rates lasts. The next number represents how often the mortgage rate can adjust in years. Mortgage lenders add a margin rate to the index that goes into effect when a mortgage loan is given.
If your index rate is 2.5%, the lender’s margin rate is 1.25%, then the mortgage rate will be 3.75% until the new adjustment period. When you are comparing adjustable rate mortgage quotes, you need to take note of which index will be used and each different lender’s margin rates because these can vary with each lender.
Fixed Mortgage Interest Rate
Your mortgage rate, also known as the interest rate, represents an annual percentage of your loan amount. If you were to borrow $200,000 at a fixed mortgage rate of 3.5%, the annual amount of interest would be $7,000. As you make payments on your fixed rate mortgage, more of each of your payments will be applied to the loan amount rather than the interest, which is a process called amortization.
The Consumer Financial Protection Bureau says you shouldn’t choose a mortgage until after you have applied and received a good faith estimate, which you will get after applying for the mortgage. The good faith estimate will include an estimation of lender fees and costs along with the estimated amount for closing.
Some mortgage lenders charge discount points for you to lock in low mortgage rates. Of course lenders advertise these rock-bottom interest rates, but these are usually only available for borrowers with exceptional credit. Lenders may also charge discount points that add to the cost of the home loan. One discount point is the equivalent of one percent of the total mortgage amount. If you aren’t completely sure what type of mortgage you need, request quotes for both adjustable rate loans and fixed rate loans.
Annual Percentage Rate
The APR is the calculation of the mortgage interest, loan fees and other costs expressed as a percentage of your mortgage amount. When you are comparing each mortgage offer, you can use the APR to choose between similar loans.
More Tips for Successful Mortgage Shopping
- Mortgage rates change and estimated fees and costs can vary. Budget in extra money to cover these changes or unexpected situations that can increase costs.
- Make sure to compare and negotiate your mortgage quotes with prospective mortgage lenders. Although appraisals and recording fees can’t be negotiated, lender fees and discount points can be.
- Choose the mortgage lender that you will feel comfortable working with. If a loan officer is too busy to answer your questions, doesn’t answer questions honestly or tries to handle things without including you, find a new lender.
Important Questions to Ask a Mortgage Lender
- What is the current interest rate of the mortgage?
- Are discount points included?: In general, you’ll want the mortgage loan with the lowest interest rate without discount points, but if you have extra money and plan to live in the home for a long time, you could benefit from paying discount points.
- Can you provide me with a good faith estimate that includes all fees and closing costs? If the lender won’t provide the good faith estimate, find a new lender.
- Can I lock in an interest rate and how much will it cost me to do so?Lenders will let you secure an interest rate before closing on a mortgage rate. If you think interest rates may be on the rise, you will want to lock in the current rate. Lenders will charge you a fee to lock in your rate, so the lower the fee, the better.
- What is the minimum down payments required for the mortgage loan? Many lenders require a 20% down payment and will need to know how much you can put down on a down payment to ensure they offer you the best loan options for your situation.
- What do I need to have to be pre-approved?
- Is there a prepayment penalty on the mortgage loan? If you will be penalized for paying on your mortgage loan early, this means you won’t be able to get out of debt before your mortgage loan is paid off. The odds of you staying in the home more than 30 years without refinancing your mortgage are very low. Find a lender that won’t penalize you for making payments early or for making extra payments.
Do your research and make sure that you explore all options for your mortgage loan. Ask friends and family, look online and meet with lenders before settling on a mortgage loan. Don’t be afraid to ask questions – the right lender will have all the answers you need without hesitation.