Shopping for the Best Mortgage Rate

When Smokey Robinson sang “You better shop around” back in the Motown era, he shared advice from his mother that applies to mortgages as well as women. The singer’s mom told him: “Get yourself a bargain son, don’t be sold on the very first one.” Here’s how to shop for the best mortgage rates.

Comparison shop

Step number one is to contact a variety of lenders. There are five places to check:

    1.  The FHA.  If you qualify for an FHA loan, you’ll have several advantages. Because the FHA insures these loans, banks are more willing to lend money to people with less-than-perfect credit. You only need to put 3 percent down, and interest rates are competitive. In return, however, you must pay an upfront mortgage insurance premium and a small ongoing monthly fee. There’s a catch: you may not be eligible for enough money to buy the house that you want.

    2.  Credit unions. Members of these financial institutions are often eligible for reduced mortgage rates, so it’s worth checking with them.

    3. Your personal bank. Many banks offer discounted rates for current customers or to people who are willing to deposit new money and become customers. It’s also nice to work with a bank where you can have face-to-face contact with a mortgage professional. Many online lenders do everything via email or phone.

    4.  Search the Internet.  Always search the Internet to find banks offering competitive rates that may not be located in your area. Be prepared, however, to discover that the mortgages rates quoted aren’t always available. Online banks generally post their best mortgage rates, and not every borrower will qualify for them.

    5.  Use a mortgage broker. Mortgage brokers have access to a vast majority of lenders, and can help you to find the best available mortgage rates. However, help like this doesn’t come free – you’ll pay an origination fee, which can be several thousands of dollars. The best way to locate a broker is to get referrals from friends and family.

Higher risk, higher rate

Your credit score and history play a huge role in the rate that you’ll qualify for. The better your credit, the better your mortgage rate. Your first step is to review your credit report to make sure that there are no errors. If there are, contact the credit agency immediately in writing to correct the mistakes.

If a mortgage is on your horizon, make sure that your payments on all your credit card bills are on time for a minimum of six months. You could also boost your credit score by paying down your credit card debt, so the percentage of credit used to available credit is stronger.

Finally, put a hold on applying for new credit cards. Each time a potential creditor pulls your credit report, your score can be reduced by up to 12 points.

By shopping around and following these credit dos and don’ts, you can find the best available mortgage rates. Smokey’s mother would be proud.