Home Financing and Mortgage Rates:
How Can I Shop for the Best Mortgage Loan?
By Gretchen Wegrich Updated on 8/9/2013
Your home will probably be the largest, most expensive, and most significant purchase you'll make in your lifetime. The only way for many to buy a home is through financing that purchase with a mortgage. If you fall into that category, you must take steps to find the best terms and lowest interest rate to fit your needs. Your mortgage will likely remain with you for many years, and possibly as long as you live in your house. Here are some excellent tips that will help you shop for the right mortgage.
Know your Credit Score
As soon as you know you are interested in buying a new home, you should order a credit report and review it for accuracy. Studies have shown that a significant number of credit reports contain highly noticeable errors, which can affect your interest rate, and can even be the difference between whether you loan gets accepted or rejected. If you find errors in your report, you can dispute the information in question in order to clean up your report and improve your credit score.
You are entitled to one free copy of your credit report every 12 months from each of the three credit reporting agencies. You can order them online from annualcreditreport.com, or by calling 1-877-322-8228. You will need to provide them with your name, address, social security number, and date of birth to verify your identity.
Identify your Goals
How soon do you hope to pay off your mortgage? How long do you intend to remain at this residence? What monthly payment can you afford? How much money can you put toward a down payment? Do you have a secure source of income? What tax bracket are you in? Do you have significant savings? Are you significantly risk-averse? You'll need to answer all of these questions and more in order to best identify your long-term financial goals. Know what your plans are before you lock yourself into a mortgage.
As much as possible, try to understand local mortgage rates, national interest rates, and the national economy as a whole. The Treasury Note and bond markets influence mortgage rates significantly, and if you can learn to tell where the market is headed, you'll be able to make financial decisions with much greater confidence and obtain better interest rates. Still, mortgage rates are highly volatile and change often. Even if you've done your research, simply keeping up-to-date on local rate changes is highly important.
Choose the Right Loan
There are numerous kinds of mortgages available. Select the one that is best for you. Do you qualify for an FHA home loan? Are you eligible for a VA loan program? Should your loan be conforming or non-conforming? Research as many options as you can. Find out which apply to you before shopping for a lender.
Compare Closing Costs
You're ready to start shopping for a lender. Don't simply work with the first loan originator you find. Pick three or four local lenders and analyze their offers. Interest rates are important, but go deeper than that. Ask about closing costs and other fees, as well as points and down payment requirements. All of these variables can significantly alter the value of a deal, and every lender will have a different offer. Beware of hidden costs. Check everything. This is the hard part. Expect to spend a lot of time comparing lenders, and don't' give up until you've found the best deal.
It doesn't end when you've found a lender. Analyze the mortgage package to ensure that it's a perfect match for your needs. How much is the down payment? What is the length of the repayment timeline? Are there early payoff penalties? Is mortgage insurance required? Are the application fees refundable? All of these factors and more can influence the ultimate cost of the loan.
Once you're satisfied that you've found the best deal for your situation, go for it. Have confidence. You've done your research. You can compare mortgage rates every day for a month, but sooner or later you have to jump in and apply what you've learned. Get started today.
"Buying a home is typically the largest purchase anyone will make in their lifetime. How to finance that purchase is one of the most important decisions you will need to make."
How to Compare Mortgage Rates
The hardest part of finding the best deal on a mortgage is comparing mortgage packages between different lenders. There are numerous costs involved and numerous variables to consider. Beyond the down payment and the principal of the loan itself, you'll need to analyze the interest rate, the up-front points required, and the fees or closing costs. Let's define these first.
Compare all of these costs for each mortgage package you are considering with each lender you're working with. This may not seem too complicated at first, and in principle, it isn't—comparing prices is as simple as basic addition. But there are other non-price factors to consider as well.
Find out what the lock-in period is for each lender. The lock-in period is the time frame during which the quoted prices will remain the same. Rates fluctuate rapidly, and other costs—such as point requirements and fees—fluctuate along with them. In other words, all the prices that your lenders just quoted you are subject to change unless you lock-in the rate. But lenders recognize that this is confusing. A lock-in period is a certain length of time—generally 30 to 60 days—during which the lender promises not to adjust his or her quoted prices. If you find a deal that seems too good to be true, check the lock-in time frame. It may be that the lender doesn't guarantee the prices for more than 10 days. Don't make an offer on a home unless you have found the mortgage package that fits you and that mortgage package has been guaranteed to you by your lender for a sufficient length of time.
Analyze the features of all possible loan package arrangements. Are there cash reserve requirements? Maximum Loan-To-Value (LTV) requirements? Are there penalties in place for early repayment? Is the interest rate fixed or adjustable? These elements of the loan may not appear as up-front costs, but they could significantly affect the ultimate value of one loan package over another. As a side note, when comparing offers between lenders, compare identical loan types. Don't compare a fixed rate to an adjustable rate—they're very different.
Let's summarize this. Comparing two identical loan types between several lenders involves 3 steps.