Getting a better rate on a home mortgage loan can save you plenty. And it doesn’t have to be a lot better. Because a mortgage is a long-term loan, small percentage changes in the interest rate add up to big dollar differences with the passage of time. Shopping for a better rate is worth some effort.
The Difference a Rate Makes
So how much difference does it make? Say you get a conventional 30-year fixed-rate loan with 3.75 percent interest rate on the purchase of a $300,000 house. With a 20 percent down payment, the loan will be $240,000 and the monthly interest and principal payment will be $1,111. The same loan at 3.5 percent interest – just a quarter-point lower – would have a payment of $1,078.
A $33 difference each month may not sound like much. But over 30 years it comes to $12,157. Even if you sell the house after 10 years and pre-pay the mortgage, you’ll have paid $3,960 more with the quarter-point higher rate. With that in mind, here’s how to shop rates.
First Things First
Buying a home is an orderly process and you want to do the steps in the right order. To get the best rate, don’t start looking at houses until you are pre-approved for a loan. Otherwise, you may find your perfect dream home and then have only a day to shop for rates. Shop for financing first. Then shop for a house.
The essence of rate shopping is comparing offers from different sources. There are lots of places to look for mortgage loans, including banks, brokers and online lenders. Plan to shop at least one of each. That means getting at least three quotes is good. And five is not too many.
You can find current market rates from individual financing sources in your newspaper or online. Online comparison sites that gather quotes from many different lenders can make this job a lot easier and more convenient.
Don’t forget personal referrals, however. It’s important to work with a loan provider with good customer service to guide you through the process. Friends and family’s experiences are worth checking out. Real estate agents can be especially knowledgeable referral sources.
The bank where you keep your checking and savings accounts and perhaps get car loans may be worth a call as well. However, even though it can feel comfortable to work with a familiar brand, commercial banks are not always the most economical lenders. So check around.
Pick A Loan
Bear in mind, the market rates you see online are averages. Different lenders offer different rates. And rates aren’t the only concern.
The type of mortgage you get can make a large difference in your total cost. Adjustable-rate mortgages, for instance, generally have lower interest rates in the beginning years and may be cost-effective for people who don’t plan to stay long in their current house. Fifteen-year mortgages have significantly higher monthly payments than 30-year mortgages but also save plenty on interest charges. Not all loan sources offer all types of loans.
Don’t Forget the Fees
Along with interest rate and loan type, fees are a major factor. All lenders charge fees in addition to the interest on the loan. Typical examples include fees for application, appraisal, discount points, loan origination and underwriting. The number and amount of these fees vary depending on the loan source. When you check rates with loan sources, ask about fees as well.
Another variable is the size of the down payment. A larger down payment can get you a lower rate, but the difference may vary among lenders. Similarly, private mortgage insurance or PMI, which is generally charged to borrowers who put down less than 20 percent, can add hundreds of dollars to your monthly payment for the life of the loan. Ask about PMI.
All these costs, from rates to fees, are negotiable. For instance, say you have a low credit score and your loan source tells you that’s why you can’t get a better rate. Try explaining any credit report issues. You may be able to talk yourself into a lower rate.
Within three days of when you apply for a loan, your lender will give you a three-page document called a loan estimate. This LE will have all the details including an estimate of the interest rate, fees, other monthly expenses such as insurance and taxes that will be included in the payment and closing costs. Assuming you have the financial resources and your credit is approved, the lender generally is obligated to give you the loan under these terms.
When you get your LE, you can put it to at least two good uses. First, feel free to show the offer to other lenders who have given you higher quotes. You may be able to get them to beat it.
Second, once you have an LE you’re happy with, ask your loan source for a lock-in. This is a written promise to make you the loan at the stated interest rate and other terms. You will normally have to pay something for this lock-in. But if it gets you a better rate, your future self 30 years from now could be very appreciative, and many thousands of dollars richer.