Getting the Lowest Mortgage Rates

Written by
David Mully
Read Time: 4 minutes

Everyone wants to get the lowest possible mortgage rate - so how do you go about getting it?

Have Good credit

The first thing is you need to have good credit - that's a no brainer. The higher your credit score, the less interest you'll have to pay.

One thing to remember about credit scores is that small differences can have a significant effect on the interest rate you get. Lenders rank credit scores in tiers, or brackets. If you've already got decent credit, moving up or down into the next tier will make a difference of about 0.2 percentage points on the interest rate for a 30-year mortgage - for example, 4.4 percent instead of 4.6 percent.

There's not a lot you can do to improve your credit in a hurry. Paying down a high debt load is one exception, particularly if it's credit card debt. If you're using over one-third of your total debt limit, it could be hurting your credit score. Even 20 percent might take you down a notch.

Fixing errors on your credit report is another way. Order copies of your credit report from each of the three credit reporting agencies (Experian, Equifax and Transunion - you can get a free report from each once a year) and check for any errors regarding debts or payment history. If you find any, contact the credit agency in question to dispute it, along with copies of any supporting documents.

Down payment/equity

Though it's often overlooked, the size of your down payment (or amount of home equity, if you're refinancing) can affect your mortgage rate. The best rates are typically given to those who put down 20 percent or more - when refinancing, you may need 25 percent equity to get the best rates. Other cutoffs are around 10 percent or 5 percent, so you may find that rates change above and below these points.

Another thing to keep in mind is that you'll need mortgage insurance for any home loan with less than 20 percent down or home equity. Private mortgage insurance charges an annual premium that typically is around half a percent of the mortgage balance, which is the same as paying another half percent in interest. So if there's a way you can come up with 20 percent down, it's usually a good idea to do so - perhaps by going for a cheaper house.

Paying points

One of the simplest ways to reduce your interest rate is by paying discount points. These are a form of prepaid interest where each point costs 1 percent of your loan balance - or $1,000 for each $100,000 borrowed. In return, you can reduce your interest rate by one-eighth to one-quarter of a percent for each point purchased, up to about 3 points or so.

Buying points can make sense if you plan to own the home for awhile - say a decade or so. You have to own it long enough for the savings on the interest rate to outweigh the additional money you paid in points.

The way you do this is, using a mortgage calculator, to figure how much you would save each month on your mortgage payment by paying points and determine how many months it would take for your accumulated savings to exceed what you paid in points - that's your break-even point, roughly speaking.

Shop around

Finally, this is THE most basic rule. Different lenders will offer you different rates - period. You can't know what's the lowest rate you can get until you obtain estimates from a variety different lenders.

Unfortunately, some lenders can be fairly crafty about disguising their interest rate. They do this by offering what appears to be a very low rate, but pad it with a bunch of add-on fees that raise the rate you'll effectively pay. These can include steeper charges for origination fees, underwriting, insurance and a whole bunch of fees that do little more than pad your bill.

The most straightforward way to compare offers from different lenders is by comparing the Annual Percentage Rate (APR) from each, as indicated on the Truth in Lending Disclosure form they are required to provide when offering you a loan.

The APR reflects the total cost of borrowing, beyond just the interest rate itself. Basically, it takes the all the lender fees you're paying (origination, points, document prep, etc.) and rolls them into your interest rate. So if you're borrowing $250,000 but paying $10,000 in fees, the APR is whatever interest rate on a $250,000 loan that would produce the same monthly payment as your official interest rate would produce on $260,000 loan.

These are four of the main ways to get the lowest possible mortgage rate. They all take some effort on your part, but in the end you can be rewarded with some significant savings on your mortgage costs.

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