Borrowing a mortgage to buy or refinance a home can seem like a daunting process, especially when mortgage rates are much higher than they were just over a year ago. But with a little comparison shopping, it's possible to get a much lower mortgage rate than what you're offered initially.
Mortgage rate shopping is well worth the effort, and it's something that any homebuyer can (and should) do. Comparing mortgage rates among at least two lenders can save you $600 per year, while shopping with four or more mortgage lenders can translate to $1,200 in annual savings, according to research from Freddie Mac.
"In the context of today's rate environment, although mortgage rates are averaging around 6%, many consumers that fit the same borrower profile could have received a better deal on one day and locked in a 5.5% rate, and on another day locked in a rate closer to 6.5%," Genaro Villa, housing economist at Freddie Mac, says in the report.
It pays to compare mortgage rates across three to five lenders, but you may not know where to begin shopping. Here are a few places to start:
- Ask your real estate agent for recommendations. Your real estate agent may have a relationship with a local mortgage broker who understands the types of mortgage programs you may qualify for based on where you live. For example, some states have first-time homebuyer programs that can save you money on your down payment and free up cash to buy down your mortgage rate. Additionally, a broker typically works with multiple lenders and can help you find the lowest rate for your financial situation.
- Use online mortgage rate comparison tools. There are several websites that let you compare mortgage rates across multiple lenders at once, which can save you time and help you find the best possible offer. Keep in mind that by inputting your contact information, you may be solicited directly by lenders – in some cases, you might get dozens of phone calls. Be careful not to share any sensitive information before checking that a lender is reputable by reading lender reviews.
- Get rate quotes from different types of lenders. Expand your search beyond traditional banks to online lenders and credit unions. Since credit unions are nonprofit and member-owned, they're typically able to offer lower interest rates and fees on lending products, including home loans. You can usually join a credit union based on where you live or work, but there are several national credit unions that grant membership to consumers if they simply deposit money into a checking account or make a small donation to a partnering charitable organization.
It's important to keep your mortgage rate shopping within a two-week window to minimize the impact to your credit score. Getting preapproved for a mortgage counts as a hard credit check, but multiple inquiries within a 45-day window count as a single inquiry using the newest FICO scoring models. Since other scoring models limit this grace period to 14 days, shopping for rates within two weeks is the safest bet for safeguarding your credit.
Additionally, be sure to ask for preapproval letters from the lenders you apply with, so you can start putting offers on homes. In most cases, you can't lock in a mortgage rate until a seller has accepted your offer on a home, which means that rates can change between the time you start rate shopping and the time you enter a purchase agreement with the seller.
You may be able to get a lower rate by borrowing one type of mortgage versus another. For instance, borrowers with excellent credit may get a lower mortgage rate by borrowing a conventional loan, while those with fair credit could save with a government-backed Federal Housing Administration loan. Lenders typically offer both conventional and government-insured loans, so they should be able to walk you through several options. Below are a few loan types to consider when shopping with mortgage lenders.
The most common type of mortgage, a conventional loan, is backed by a private lender rather than the federal government. Conventional loans typically have stricter credit requirements than government-backed loans, but they may offer lower mortgage interest rates for well-qualified borrowers.
Conventional loans are fairly flexible and come with a range of repayment options. The interest rate can be fixed or adjustable, and the loan length is usually between 10 and 30 years. The down payment on a conventional loan can be as low as 3%, although you'll need private mortgage insurance if you put less than 20% down. Plus, conventional mortgages provide an option for homebuyers who need jumbo loans with a loan amount that's above the conforming loan limit.
Mortgages that are insured by the federal government may come with lower rates and more lenient requirements than conventional loans, especially for applicants with fair credit. Here are a few common types of government-backed mortgages:
• FHA loans: Homebuyers with a credit score of at least 580 may qualify for an FHA home loan with a low interest rate and as little as 3.5% down. Those with a credit score between 500 and 579 may see higher rates and are required to make a 10% down payment. Drawbacks include the upfront FHA mortgage insurance premium, which is 1.75% of the loan amount, that is paid at closing or rolled into the loan. An annual premium ranging from 0.5% to 0.75% of the loan amount is added to your monthly mortgage payment. Plus, FHA mortgages must meet the conforming loan limit in your area, meaning that they're not an option for homebuyers who need a jumbo loan.
• U.S. Department of Agriculture loans: USDA mortgages offer some of the lowest mortgage rates available and as little as 0% down, although they're only for low- and moderate-income applicants who are buying a home in an eligible rural or suburban area. You'll have to pay a mortgage insurance premium of 1% upfront and 0.35% annually – making it significantly cheaper than FHA mortgage insurance. You can see if a home is in a USDA-eligible area using this interactive map, which also shows the income limits for each area. Additionally, USDA loans must adhere to the same conforming loan limits as FHA loans.
• Department of Veterans Affairs loans: Eligible active-duty and retired military personnel can qualify for VA mortgages that boast competitive rates and as little as 0% down with no mortgage insurance premiums. The VA also offers jumbo loan options if your purchase exceeds the conforming loan limits. On the downside, these loans come with a VA funding fee between 1.4% and 3.6% of the loan amount, depending on the down payment and the number of times you've used a VA loan before. The VA funding fee can be paid upfront at closing or financed into the loan amount.
A 30-year, fixed-rate mortgage is a reliable choice for many homebuyers. But if your goal is to get the lowest mortgage rate possible, then it may not be your best option. Consider the different types of interest rates and repayment terms below:
Fixed vs. Adjustable Rates
Most mortgages have a fixed interest rate that remains the same throughout the course of the loan. Adjustable-rate mortgages, or ARMs, are a less-common alternative that can grant you a lower initial mortgage rate for the first few years of the loan. With a hybrid ARM, your mortgage rate starts out lower for a fixed-rate period that usually lasts three, five or seven years. When the fixed-rate period ends, the rate can adjust every year or six months based on market conditions.
Because ARMs tend to adjust to a higher rate (and monthly payment) after a certain point, they come with an inherent amount of risk. But if you plan on selling or refinancing before the fixed-rate period expires, that can reduce the risk of borrowing an ARM. It's an option worth exploring with your lender if you're not buying your forever home.
15-Year vs. 30-Year Terms
If you decide that an adjustable rate isn't right for you, it may be possible to lock in a lower fixed mortgage rate by choosing a shorter loan term, such as 15 years or 20 years instead of the traditional 30-year term. This way, you have a permanently reduced rate throughout the course of repayment, and you don't have to worry about your payments rising down the line.
A 15-year mortgage will come with higher monthly payments, but you can potentially save thousands of dollars' worth of interest charges over the life of the loan, all while paying down your principal much faster and getting out of debt in half the time. You can use a mortgage calculator to see if you can afford the monthly payments of a shorter loan term.
Your mortgage interest rate is just one factor that goes into the total cost of borrowing. To get a better idea of which lender offers the cheapest loan overall, you should compare the annual percentage rate, or APR, which includes the interest rate as well as other financing charges such as discount points and mortgage origination fees that cover the cost of the application and underwriting.
The lender is required to provide a loan estimate that details the loan's interest rate, APR, monthly payment, origination charges, prepayment penalties, lender credits and estimated upfront closing costs. You can find the APR on Page 3 of your loan estimate. Take a look at this sample loan estimate from the Consumer Financial Protection Bureau for more information.
By comparing loan estimates, you can tell if one lender offers lower interest rates but higher fees, and vice versa. For example, you may want lower upfront costs charged by one lender, or greater lifetime savings with another. It's also important to consider whether a lender offers closing cost assistance grants that can potentially be used to buy down your rate. A few banks that offer lender credits are Bank of America, Chase Home Lending and PNC Bank.
Mortgage interest rates can change daily; in times of high rate volatility, rates can even change several times throughout the day. Once you've had an offer accepted for a home, stay in touch with your top few mortgage lenders in the following days to see how rates are fluctuating. You can ask the lenders to update you with any rate changes so you can decide whether to lock your mortgage rate if rates end up dropping on a given day.
A mortgage rate lock is just what it sounds like – it locks in your interest rate (and monthly payments) during the closing process, so the rate you and the lender agreed upon doesn't fluctuate. Most mortgage lenders let you lock in a mortgage rate for up to 30 days at no additional cost, but some lenders offer 45-day rate locks. Extending your rate lock period typically costs a percentage of the total loan amount, such as 0.25%. Rate lock extensions usually last around 15 to 60 days, and longer-term rate locks are more expensive.
Rate locks can protect you against volatility and rising interest rates, but it may feel like a burden if rates actually decline while you're closing on a home. Lenders may offer a rate float-down option, which allows you to take advantage of lower rates if they do fall. Keep in mind that there will be a fee to choose a float-down option, although some lenders have started offering rate-drop protection programs that allow you to float your rate down once at no additional cost.