Key Takeaways
- Comparing lenders ensures you get the best mortgage rate and terms.
- Mortgage offers vary based on your credit, down payment, and many other variables.
- Fixed-rate loans provide stability, while adjustable-rate loans offer initial flexibility.
Shopping around for a mortgage can feel like an overwhelming task when you’ve already shopped around to find the right home. But by taking a few simple steps before you commit to your loan, you could save a lot of money in the long term, so it’s worth the extra leg work; data suggests that borrowers who shop for mortgage options save thousands of dollars on their loan.
Choose your mortgage type
The first thing for you to weigh is what type of mortgage loan is best for you—a conventional loan or a government-insured loan. Conventional loans are backed by private lenders like credit unions, banks, and mortgage companies. These private lenders tend to require higher credit scores and more substantial down payments for qualification.
Conversely, government-insured loans like those issued by the Federal Housing Administration (FHA) or Veterans Administration (VA) are backed by the government, but issued by a bank or lender that has been preapproved by the administration or agency. FHA loans require lower credit scores and smaller down payments, as they are intended for people who would not be approved for conventional loans.
Additional considerations:
- FHA loans come with higher interest rates than conventional loans.
- FHA loans can only be used for a primary residence, and the amount borrowed must fall within government-mandated limits.
- Conventional loans will take into account your debt-to-income ratio (DTI). Your DTI should be around 36%—meaning that you spend less than 36% of your income on debt payments.
- Conventional loans come in many forms, including conforming conventional loans, jumbo loans, subprime loans, and adjustable rate loans.
Shop mortgage rates
A fixed-rate loan means your mortgage rate is fixed in place for the duration of the loan term, and your payments will never change over your 10-30 year term.
Adjustable-rate (ARM) loans do exactly as the name suggests: they adjust. Most ARM loans have a fixed rate for a certain number of years (five, seven, or 10), and then the rate increases every year thereafter. A 5/1 ARM loan is common; its rate will stay fixed for five years, then adjust once a year for the rest of the term length. If you plan to be in your home for longer than five, seven, or 10 years, an ARM is probably not your best option. These loan rates are best for people intending to stay in their home for a shorter period of time, who want to take advantage of the original low rate of an ARM.
Key variables that impact your mortgage rate
The inner-workings of creating a mortgage are very complex. It’s nothing you have to worry about, but there are dozens of variables that determine what your rate will be. Here are some of the most impactful things you should be aware of.
1. Your credit score
Lending money is all about managing risk, and lenders use credit score to determine how risky you are. A higher credit score is less risky and will receive a better offer. It’s that simple. So while you’re in the borrowing process, don’t do anything that would hurt your credit like miss a payment or open a new credit card.
2. Your down payment
A larger down payment reduces the lender’s risk, which can lead to a lower interest rate on your mortgage. By putting down more money upfront, you demonstrate financial stability and decrease the loan-to-value ratio, making you eligible for better terms.
3. Points aid
You’ll hear lenders talk about paying points. Points are simply pre-paid interest. It’s a way for you to pay a percentage of the loan at closing in order to lock in a lower interest rate. You’ll have to determine is paying points is good for you or not, but generally speaking you’d want to buy down the rate with points if you think you’ll be in your home – and this loan – for a long time and want to reduce the total interest you’ll pay.
4. Debt-to-income ratio
Your debt-to-income (DTI) ratio is a key factor lenders use to assess your ability to repay a mortgage. This will include debt you have on things like auto loans, credit card payments, student loans and more. A lower DTI ratio shows lenders you manage debt responsibly, which can lead to a lower interest rate and better loan terms.
You can compare mortgage rates in our mortgage rate comparison calculator below.
Choose your lender
The last step before signing on the dotted line is to choose your mortgage institution. Let’s say you’ve decided that a conventional fixed-rate loan is the best for you, but now you need to choose the best lender for your situation. Keep in mind that mortgage lenders will do a hard inquiry to your credit reports, and this can affect your credit score for a short period of time. It’s recommended that you submit your mortgage applications within a 45-day time period because the credit inquiries will be treated as one inquiry on your credit report. When comparing institutions, remember that each lender will offer different interest rates, discount points, promotional rates, and additional fees, so you will need to consider which offer is best for you.
Comparing lenders and offers
Here are some of the questions you should ask when comparing lenders.
1. What is your par rate and APR?
A “par rate” is the rate with no points (i.e. pre-paid interest) on the loan. It’s an easy way to compare what different lenders are offering. And the Annual Percentage Rate (APR) is a metric that includes all fees and translates it to an annual rate. This is different from your interest rate, and lenders are required to disclose this to you when they tell you an interest rate.
2. What lender fees and credits do you have?
This is where you’ll have the best chance to negotiate. The interest rate you’ll get will depend on your personal situation and market conditions that can change many times a day. So the fees charged by lenders is usually the place where you can find some savings.
3. Are there prepayment penalties?
Prepayment penalties aren’t common, but they do exist. You don’t want to get caught in a situation where rates fall, you want to refinance and you can’t because the prepayment penalties are simply too high.
3. How long does it take to close a loan?
You have a contract with your seller and a set closing date. It’s critical you don’t miss that so the time to close is obviously very important, and this is a place where lenders can vary widely. Some lenders can close in under 2 weeks (as long as there’s no delay with the appraisal or inspections) while others take over 45 days. You definitely want to be aware of what each lender can do.
The mortgage process can be daunting, but if you research the right type of loan for you, shop around for the best mortgage rates, and compare mortgage institutions, you will find the best deal for you.
FAQs
What is the different between a fixed-rate and adjustable-rate mortgage?
Fixed-rate mortgages have consistent payments throughout the term, while adjustable-rate mortgages (ARMs) offer lower initial rates that increase over time.
How do I compare mortgage lenders?
Compare factors such as interest rates, fees, discount points, and customer service to find the best lender for your needs. Request a Loan Estimate (LE) from each lender you speak with. That will make it easier to compare offers.
How much home can I afford?
That is different for every borrower. There are debt-to-income (DTI) limits on each type of loan, but your financial situation is always unique. Use our mortgage calculator to estimate the right payment for you.
