How to find the best mortgage rates? How do you find a good lender? These are some of the common questions that first time home buyers face. It is also something that I come across daily in my job as a Realtor. Today, I am going to share with you some insider information about how you can find the best mortgage lender and interest rate.
Other Loan Costs Besides the Rate
First, you have to understand that the rate itself is not everything; there are other important components you need to know about to compare everything apple to apple. Here are some of the things to consider besides the rate:
- Lender Fees – What does your lender charge to originate the loan? Different lenders will have different names for the fee(s) they charge for issuing you the loan. I have seen as little as $295 and as much as $9,000! Note: This $9,000 fee is not typical. It was a rip off attempt by a Mortgage Broker who the client found on her own. Although we were able to negotiate this down to less than $2,000; if she had listened to me from the beginning, we could have saved her a lot of money!.
- Discount Points – Is the lender charging any point to give you that low, low rate? One point is equal to 1% of the loan amount, and you pay this upfront to lower your rate (and monthly payment).
- Type of Loan – What type of loan is it? Each type of loan, e.g., VA Loan, FHA Loan, 0% Loan, Conventional Loan, etc. have different rate and cost implication. You want a good lender who can help you compare each option.
- Funding Fee – Does your loan have a funding fee? For example, FHA Loans and VA Loans charge buyers a funding fee. The VA Funding Fee is waived if the borrower has a qualified disability.
- Mortgage Insurance – If you put down less than 20%, your loan comes with a Private Mortgage Insurance (PMI). Depending on your loan, you could prepay the PMI at closing and eliminate it from your monthly payment. FHA loan has FHA Mortgage Insurance Premium which stays for the life of the loan, which you can only get rid of by refinancing the loan. Mortgage insurance can add significant cost to the loan.
Once you identify the best loan option for you, you can start your comparison shopping. Here is how to get the best rate for your home mortgage.
Things You Can Do to Position Yourself for the Best Rate
There are also things that you can do to help you get the best possible rate.
- Save 20% for Down Payment – When you have 20% for the down payment, you will be eligible for better mortgage terms and rates.
- Lower Your Debt-to-Income Ratio (DTI) – If your monthly debt payments are relatively low compared to your income, e.g., less than 36%, then you’re in a position to get a better mortgage rate. Here is how to calculate your DTI.
- Improve Your Credit Score – You want your credit score to be as high as possible. Here is how to get your credit score.
Steps to Get the Best Mortgage Rate
1. Start With Your Credit Union
If you are a credit union member, this is probably a good place to look. Often, a credit union will provide you with a more competitive rate than what you can find in the open market. This is what I did for one of my houses, and was able to get a 0.25% lower rate (if I remember correctly).
2. Ask for a Referral
Ask your Realtor, friends, family members, coworkers, and neighbors. If they know someone good, they’ll let you know. They’ll also be able to tell you about mortgage lenders and brokers that you should avoid. Here’s a suggestion from Fiscal Geek:
My best luck has been asking my friends, relatives, etc. and found an excellent broker from them. Personal referrals from people you trust are invaluable. You might also ask around at Church, odds are you have many brokers there. The bottom line is go in with as much information you can.
3. Check with Your Local Banks and Lenders
Also, you could check with your local area banks and mortgage lenders. The advantage of this method is that you get to talk to them face to face and get a feel for how you’ll be treated. Anyway, don’t feel that you have to commit to anything when you walk in and be ready to walk out if they pressure you too much.
4. Check Online for the Best Rates
You could also check online. You can do this easily by consulting our mortgage rates search tool (powered by SmartAsset.com).
Additionally, you can submit your information to LendingTree and have lenders compete for your business.
Also, be sure to check out members-only offering.
- Private Banking – In my five years as a Realtor, I came across two clients (out of about 150) that got way below market rate. How did they do it? They got their mortgage from their Private Banker. If you’re a high net worth individual, it might be worth enrolling in a Private Banking program and see if you are eligible for this exclusive opportunity.
- Costco – Yes, Costco! Costco partners with lenders across the country to bring their members some of the most competitive lenders. If you’re a Costco member, check out their mortgage program.
- Employer – Does your employer participate in any special program? For example, back when I used to work for Xerox, we had access to our Credit Union, which allowed us to get a below-market rate for our mortgage.
- Associations and Schools – Also check in with all your associations to see if any of them have a members-only discount.
Important: When you shop around for a mortgage, be sure to do all your rate shopping within 30 days. Regardless of how many credit pulls you rack up, it will count as one.
How to Compare Your Lenders
Now that you shop around a bit and narrow down to 2-3 lenders. Ask each of them to provide you with a Loan Worksheet. A loan worksheet contains key information such as
- Your lender fees. This is how much you’re expecting to pay at Closing. For this part, only focus on lender-related fee(s). This way, you can compare what you pay each lender to issue you the loan.
- Your monthly payment. This way can see the difference in the monthly payment. For this part, focus on your Principal and Interest component and PMI/MIP if any.
Taking out a home loan is a big commitment, so don’t rush into it. Get a feel of the market rate, but understand that you may not qualify for the best interest rate. Getting the best rate depends on many factors, including your debt-to-income ratio, credit score, and income. If you can’t get the rate and term that you want, you may have to delay your purchase while you improve these factors.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.
FHA loans are still financed through regular lenders, so you still have to go through them to get the best rates….
We refi’d at the bottom of the housing crash, when our 30% down had evaporated and we had no equity left. We had to get an FHA loan, but we also went through a regular lender.
Oh, and online has given us by far the best rates. 🙂