Finding the best rate and fee combo

At the end of the day, the best mortgage rate alone doesn’t make for the best offer. 

Your interest rate and closing costs both have to be factored in. Their relative weight will depend on your financial goals and how long you plan to stay in the house. 

For instance, if you’re only going to own the home a few years, a higher rate but lower upfront costs might make sense. 

But if you’ll stay the full 30-year duration of the loan, you likely want the lowest interest rate possible. In that case, you might accept slightly higher upfront costs for a lower rate. 

Looking at your annual percentage rate (APR) can often help you compare the total cost of a loan because APR includes interest and loan fees.

• Try for a last-minute credit boost. See what you can do to improve your credit before you buy or refinance. Your credit score makes a big difference in your mortgage rate, and improving it just a few points could lead to real savings
• Consider discount points. If you can afford it, you can pay more upfront for a better mortgage rate over the life of the loan. This could be smart if you plan to keep your home a long time. Discount points cost 1% of the loan amount, and typically lower your rate by 0.25%
• Negotiate your rate. Negotiating with a lender might sound intimidating, but trust us when we say it can be done. Mortgage lenders have flexibility with the rates they offer, and they want your business. A lower interest rate from a different company might be the only leverage you need to negotiate a better offer with the lender you want
• Negotiate your closing costs. Some closing costs are non-negotiable, like the third-party appraisal and credit reporting fees. But the fees your lender charges can sometimes be negotiated to save you money on the front end
• Know when to lock your rate. Mortgage rates move up and down every day. If you want to get the lowest possible rate, keep an eye on daily rate movements and be ready for a rate lock when they fall

Getting mortgage quotes might not be the most enjoyable way to spend a day. But a few hours of effort could save you thousands in the long run. 

One study found that people who compare just 3 lenders save $300 per year on average. And if you’re a savvy shopper, you could save a lot more. 

Even though a big down payment can lower your mortgage rate, it doesn’t always make sense to save for a 20% down payment. 

Tying up most of your savings in your home can put you in a tight spot if emergency expenses arise. It can also leave new home buyers short on cash for repairs and home improvement projects that are sure to come up. 

Oftentimes, it makes sense to make a smaller down payment and take a higher rate and/or mortgage insurance. This puts you in a house and lets you start building equity sooner. 

Then, you could potentially refinance to a lower rate and no mortgage insurance a few years down the line. 

Other factors that impact your mortgage rates

There are lots of different variables that affect the mortgage rates you’re offered. 

You’ll have little to no control over some of those factors. For example, nobody anticipated a coronavirus pandemic would drive down mortgage rates in 2020.

In other years, economic forces push the Federal Reserve to raise borrowing rates. 

And although the Fed doesn’t control mortgage interest, banks and credit unions offer mortgage and refinance rates that reflect the broader interest market.

Because you can’t control everything, it’s important to know what factors you change when applying for a loan. Those include things like:

• Your credit score and report: Credit repair takes time, but every point in your credit score can help. If possible, pay down your credit cards to about 30% of their credit limits before applying for a new home loan. Borrowers with excellent credit get the best rates
• Your debt-to-income ratio: Lenders check how much you owe in other monthly payments compared to your income to find out much a new home loan would impact your budget. A debt-to-income ratio above 45% could give lenders cause for concern. Pay off a couple existing loans, if possible, to improve your debt-to-income ratio
• Your loan term: Shorter-term loans like a 15-year mortgage tend to offer lower rates than 30-year mortgages
• Your rate type: Adjustable-rate mortgages advertise lower rates than fixed-rate mortgages. But when the introductory ARM rate expires, your interest rate and monthly payments could increase
• Your home’s price: Knowing your price range will keep your debt-to-income ratio on track and open up more types of mortgages — especially for first-time home buyers. Use a mortgage calculator to experiment with different loan amounts to find your price range  
• Your down payment or equity: When buying a home, a bigger down payment amount can earn you a lower interest rate. With a mortgage refinance, the amount of home equity you’ve built up can also impact your rate

If you can improve your financial situation in all or most of these areas, you’ll have access to some of the lowest-rate loans on the market. 

Your monthly mortgage payment: More than an interest rate 

Home shoppers often think in terms of interest rates when shopping for a home loan. But interest is only one piece of the puzzle. 

Your total mortgage payment will also include the following costs: 

• Property taxes: Cities and counties levy property taxes each year. Home buyers often break these annual payments down into 12 monthly installments
• Homeowners insurance: This annual expense can also be prorated and added to your monthly payment
• PMI or MIP: Unless you put 20% down on a conventional loan, you’ll need to add mortgage insurance onto your monthly payments. That could be private mortgage insurance (for a conventional loan) or mortgage insurance premium (for an FHA loan). Mortgage insurance normally adds around 1% of your loan balance to your payments each year

If you live in a condo or planned unit development, you’ll also be responsible for HOA dues each month.

As you calculate how much home you can afford, be sure to add in these extra costs so you’re budgeting accurately.

Verify your new rate (Jun 10th, 2021)

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