How do I find the best mortgage rates?

There are several factors that determine the mortgage rate you qualify for.  Since some of these factors are within your control, it is a great idea to plan ahead to make sure you get the best possible rate you qualify for when the time comes. 

The most important factors in qualifying for a good rate:

Know your credit score.  Most lenders give the best rates to consumers with a FICO score of 760 or higher.  If your credit score is high, keep it that way by not closing any accounts or applying for new ones.  If your credit score is low, there are several things you can do to improve it:

o   Check your credit reports for errors such as any accounts that aren’t yours, payments listed as late that were paid on time, debts paid but shown as outstanding, or debts listed that are greater than 7years old (other than bankruptcies, these should not be reported after 7 years)

o   Pay down credit card debts

o   If you have had late payments in the past, make a concerted effort to pay everything on time going forward.  A good way to do this is to set up automatic payments so you never forget a payment.

o   Never close unused accounts- these help your utilization ratio (the ratio of your debt to available credit) which factors into your credit score.

o   Keep your oldest accounts open- the length of your credit history also comes into consideration when determining your credit score.

Low debt to income ratio.  Ideally, your total monthly liabilities, including your mortgage payment, should be less than 40% of your total gross monthly income.  You can reduce this liability by paying down debts and/or increasing your income.

Stable job history. Those with poor credit or unstable job history may qualify for a Federal Housing Authority (FHA) loan.  Learn more about FHA loans here: https://wallethub.com/answers/who-qualifies-for-fha-loans-11/

Proof of assets. Ideally, lenders want to see you have savings to pay all your bills, including your mortgage, for at least 6 months in the event of financial hardship.  If you have significant savings, this will increase your likelihood of getting a low mortgage rate.

Down payment. If you are able to contribute a significant down payment, this could lower your mortgage rate.  If your down payment is less than 20%, most lenders require the purchase of private mortgage insurance (PMI). 

If you take these factors into consideration and do everything in your power to improve your credit score, you will be in good shape when the time comes to apply for your loan. 

When you are ready to apply

The first step is to know how much home you can afford. Your mortgage should not exceed 28% of your gross income.  It is a good idea to use an online mortgage calculator to determine the mortgage you can afford based on your current financial situation.

Once you have determined the mortgage you are able to afford, it’s time to get rate quotes.  When shopping for rates, get quotes from a variety of sources to make sure you are comparing all possibilities.  Try a quote from a mortgage broker, a banker, both local and national lenders, and a credit union.  Also check comparison websites to compare rates.  When you ask for your quote, ask if the current rates are the lowest rate for that day or week.  Be prepared to negotiate with your lender or broker.  Brokers arrange the transaction for you and will contact several lenders to get rates.  However, they are not obligated to get you the best rate so it is best to contact several brokers to compare rates. 

Beware of overages.  As an additional incentive, brokers are allowed to pocket the difference between the lowest rate available and the rate a buyer agrees to pay as additional compensation.  It is not in their best interest to give you the lowest rate so make sure you are prepared to negotiate and ask for the lowest rate available.  When you get your quote, establish if it is fixed rate or variable rate.  If at all possible, go for the fixed rate loan.  If it is adjustable, ask how it will vary.

The actual interest rate is not the only factor you need to consider.  Beware of fees and charges in addition to the interest rate.  These can add anywhere from 3-6% to the total price of your mortgage.  Within three business days of applying for your loan, the lender must provide you with a Good Faith Estimate.  This estimate includes an itemized list of all fees and costs associated with your mortgage.  The fees you want to consider when comparing costs will be listed in your Good Faith Estimate and include Loan Origination Fees, Loan Discounts (Points), Appraisal Fees, Credit Reports, Lender's Inspection Fees, Mortgage Broker Fees, Tax Related Service Fees, Processing Fees, Underwriting Fees, and Wire Transfer Fees.  Do not include charges like title insurance, attorney fees, or escrow costs.  These do not factor in to the cost of your loan.

A note on loan discounts or points- these are fees paid to the lender or broker that are usually linked to the interest rate.  Often the more you pay in points, the lower your interest rate.  1 point is equal to 1% of the amount of the loan.  When getting the quote on points, ask for it to be quoted in a dollar amount so you know how much you will actually be paying.  Be aware that this notion of paying for a lower interest rate only makes sense if you have the cash available and plan to stay in your home long enough to recover the upfront costs. 

Make sure you are comparing apples to apples. Ask for quotes on the same loan program and for the same period.  Decide on the loan program you want and stick with it.  Comparing a 30 year fixed rate mortgage to a 15 year variable rate mortgage is meaningless.  Get quotes for the same time period with no points or additional fees included.  Another way to make sure you are comparing the same terms is to ask for a quote on the APR.  The APR reflects the actual interest rate plus the additional fees and lender charges listed above.  Generally speaking, the greater the variance between your actual interest rate and APR, the greater the closing costs.  Don’t forget to factor in the cost of your PMI to your monthly payment if you cannot afford a 20% down payment.

Once you have found a good rate, lock it in. Most lenders will allow you to lock in your rate for a period or 30-90 days to ensure that the rate you negotiate is the rate you pay when closing time comes.  Be aware that the longer the time period to lock in your rate, the higher the associated fees will likely be.

You have got it made in the mortgage shade if you are long term planning like this.  The year that you are building up to getting it though, there are some tried and true methods to getting the best rate you can.

First, totally play coy with your bank.  Offhandedly mention mortgages and how your friend, who banks with a competitor of this bank, got an AMAZING rate, and how you might consider getting one yourself if you could get a similar or preferably lower rate for yourself.  One thing that banks FOR SURE love, is you being in their debt for as long as possible.  However, they Will cut a little of your indentured servitude off in order to have competitive rates and ensure you remain in their thrall.  I'm not saying all banks are inherently evil, all banks are at least a little evil. Behind that lobby with free popcorn and sodas lies some Smaug-like-greed-creature that will give you a really good deal to keep you swimming in their pool.

Now that you've flirted with your loan agent and toyed with him/her for a year or so, it's time time to double check your financial situation to make sure you are ready to make some hefty payments every month.(and I'm not talking about your subscription to that web site you just closed super fast as your wife walked into the room.)  No matter how shamelessly you flirt, a mortgage payment is no joke.  With the best rates, it will still probably be your biggest expense every month.  It would be ideal at this time to have no other hefty bills to bog you down and overwhelm you.  Once you get in the groove and get use to paying it, then and only then should you take up another bill to mingle with the mortgage one.

You are patient and smart enough to plan this out very far in advance so I'm confident you can weather anything about this whole process, but if you have any more questions, I'd be glad to fill you in on whatever you need.  I just pass on what I've been through and try to be a straight shooter on these matters, due to the HEAVY financial nature of this beast.  By the time you hit month 6 , it will be a little less beastly and you'll be fine.  Hope this helps :)