Six Steps to a Great Mortgage Rate

By:
Peter King | January 19, 2012

At first glance, it seems that shopping for the best mortgage rate should be fairly straightforward. In reality, it can be pretty complicated and quite frustrating.

So how do you cut through the garbage to find what’s really the best mortgage rate? Follow these steps to help simplify the process and find the best mortgage deal for you.
 

Don’t focus on just the interest rate

 
A big mistake many borrowers make is to just grab the lowest advertised interest rate they can find. Unfortunately, advertised mortgage rates are not always what they seem – one lender’s 30-year rate of 4.0 percent can actually be more expensive than another’s offer of 4.25 percent for the same loan.
 
There are a lot of ways that lenders can manipulate the numbers to produce an interest rate that looks better than it really is. The interest rate is just the starting point – you want to look for a low number, of course, but you also want to see what other costs are included with that number.
 

Look at the fees

 
Fees are one of the biggest variables in mortgages. Adding in extra fees is one of the main ways can jack up the cost of a loan while offering what appears to be an attractive interest rate. The difference in fees between different loan offers can be several thousand dollars – enough to take the shine off that shiny low rate they’re dangling in front of you.
 

Forget about points – for now

 
Points, or discount points, as they’re formally known, are one the main things lenders use to knock down an advertised mortgage rate. They’re actually a way of buying a lower mortgage rate – each point you buy typically reduces your rate by about a quarter of a percentage point, and costs 1 percent of the loan amount. So if the “standard” rate on a $200,000 mortgage is 4.25 percent, buying one point for $2,000 would lower your rate to 4.0 percent.
 
Buying discount points can make sense for some, but they just complicate the picture when you’re first shopping around for a loan. Best to look for rates with no points so you’re comparing apples-to-apples, then consider purchasing points to further lower your rate once you’ve found the best deal.
 

Look at the APR

 
The Annual Percentage Rate (APR) is a shorthand way of comparing the total costs of different mortgage offers. Basically, it takes all the fees, points and other costs of a mortgage and expresses them as the effective interest rate you’re paying for a mortgage. So if you’re borrowing $250,000 at 4.0 percent and $5,000 in fees, that’s like borrowing $250,000 with no fees at 4.165 percent – that’s your APR. Lower is better.
 

Compare several offers

 
Once you’ve found several lenders who seem to be offering good terms, ask three or four of for a loan quote and compare their offers. Tell them how much you want to borrow, with how much of a down payment (or your home value and equity, if you’re refinancing) and specify that you want offers with no discount points (remember, you can also add those in later if you wish). Make all your requests the same day, preferably within a couple hours of each other – rates can change quickly. When you get their offers, they will include a Truth in Lending Form that details the interest rate, fees and APR on that loan. Compare those figures to find the best deal for you.
 

Think long-term

 
Finally, before you choose a particular mortgage, you need to think about how long you plan to be in the home you’re financing. If you’re pretty sure you’ll only be there for 5-7 years, consider a 5- or 7-year adjustable rate mortgage (ARM). Interest rates on ARMs are considerably lower than on 30-year fixed-rate loans (currently, about a full percentage point!), so if you’re going to be moving in a few years anyway, you might as well take advantage of the lower rate.
 
If you’re going to be in the home a long time, you might consider buying points, because your savings from the lower interest rate will eventually balance out what you paid for the points up front. Finally, if you want to build equity quickly (and can afford the accelerated payments), you might consider a 15-year fixed-rate mortgage, which offer rates that are significantly lower than comparable 30-year loans.
 
 

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