Shop mortgage rates
No. 3: Decide how long you'll keep the loan
This is important because it can change the kind of mortgage you choose. For example, if you are risk-averse you might choose a fixed-rate home loan for maximum safety. But in fact, if the property will only be kept for a few years, you can be perfectly safe with a 5/1 hybrid mortgage - and pay about 1 percent less in interest. On a $400, 000 mortgage, that difference in the interest rate is over $250 a month!
Indeed, shorter loan terms can get you a lower rate. While the spread between mortgage rates for loan terms vary, Tierce says that generally, 20-year fixed mortgage rates are about one-eighth percent lower than interest rates for a 30-year fixed, and 15-year fixed-rate loans are one-quarter to three-eighths percent lower than 30-year fixed-rate loans.
"You can save thousands on interest payments with a shorter loan term, although you have to make sure you can handle the higher payments, " says Mark Fowler, executive vice president of business development at The Futures Company in Chapel Hill, North Carolina.
No. 4: Contact a mix of financial institutions
Interest rates fluctuate constantly for a variety of reasons, including the occasional promotion of a particular loan product by a financial institution. For example, some lenders who are eager to generate more purchase loans might offer the best mortgage rates for homebuyers rather than refinancing homeowners, says Brian Martucci, a mortgage lender with GetLoans.com in Washington, D.C. Sometimes a credit union or bank will introduce a new loan product and offer better mortgage rates in order to entice borrowers, says Craig March, a branch manager with Inlanta Mortgage in Janesville, Wisconsin.
"It's best to diversify and try a mix of places such as a direct lender, a regional bank, a credit union, a community bank and a national bank, " says March.
No. 5: Make a larger down payment
The larger your down payment, the deeper your initial equity stake, thus the less risk you pose to the lender.
No. 6: Purchasing a single-family home
Condominiums are considered a riskier investment because they dropped in value more than other types of homes during the housing crisis, says Tierce, so mortgage rates are usually one-eighth percent higher than for a single-family home. However, if you make a down payment of at least 25 percent, that interest rate add-on will not be charged.
No. 7: Be prepared to answer some questions
Martucci says every borrower must be prepared to answer the following questions before lenders can provide an accurate rate quote:
- How large is your down payment? Interest rates vary according to your loan-to-value ratio.
- Are you buying a single family home or a condominium? Martucci says a borrower purchasing a condominium with a loan to value above 75 percent will pay a one-quarter percent higher interest rate.
- Are you purchasing? Interest rates may be higher on a refinance, especially if you are taking out cash which could raise your rate by one-eighth of one percent.
- Do you intend to waive escrow and pay your taxes and insurance yourself? If so, your mortgage rate could be one-eighth of one percent higher because that's considered a riskier loan, says Martucci.
No. 8: Do your own research
You can shop in person, by phone, or online with mortgage lenders. What you don't want to do is just mindlessly go with whatever lender your real estate agent recommends - even if you like that person - you still owe it to yourself to compare interest rates and negotiate your best deal.
No. 9: Ask about fees
The various fees associated with a loan are one reason why you shouldn't comparison shop solely based on the best advertised rate. Sometimes an advertised rate can be lower than all the rest because of all the fees associated with it.
"Some lenders blend all their fees into a loan preparation fee, while others separate them out, so be sure to ask for the total amount it will cost to close the loan, " says Martucci.
Generally, a mortgage with higher fees should have a lower interest rate, says March.
No. 10: Always provide the same information
Make sure when you request a rate quote that you provide all lenders with the same information:
- The quality of your credit
- The location, type, and use of your property
- Size of your down payment or the amount of home equity you have
Keep in mind that mortgage rates change often, so quotes obtained today can't be reliably compared against quotes given tomorrow.