8 Tips: How to Get the Best Deal on a Mortgage Loan
There are a few simple steps you can take to insure you get a great deal on a mortgage refinance, home equity or purchase mortgage loan. Finding the lowest rate is a good first step but having your credit and documentation together is a big part of actually qualifying for that low rate.
1) Consider a Shorter Loan Term
Rates on a 15 year fixed vs 30 year fixed mortgage are anywhere from an 1/8 to a 1/2 a point lower and because you are paying the loan off quicker you'll save thousands of dollars in interest payments. Getting the best deal on a mortgage is more than just the rate! For example, total mortgage interest on a $200k, 30 year fixed rate loan at 3.5% would be $123,312. For the same loan with a 15 year term your total payments would be approximately $57,357. If you are refinancing and already made several years of payments then it makes good sense to go for the shorter loan term.
2) Pay Discount Points to lower your rate
Your lender might give you the option of paying discount points at closing. A discount point is a fee you pay to reduce the interest rate on your mortgage. Usually paying 1 point will lower your rate by about .25%. Whether you should do this or not really depends on how long you plan on staying in your home. On a $200,000 loan lowering your rate .25% would save you about $30 per month. It will take almost 6 years to break even on that so if you plan on staying in your home for the next 30 years it makes sense.
3) Know your credit score
You can't get the best deal on a mortgage without having excellent credit. Get a copy of your credit report from all three credit bureaus along with your FICO score. A lender will still need to pull your credit, but at least you’ll have a chance to review your report for errors and accuracy. To improve your score, pay your bills on time and pay down or eliminate those credit card balances. If you must carry a balance, make sure it’s no more than 20 percent to 30 percent of your available credit limit. Also, check your credit score regularly and look for any mistakes. If you find any errors, work to clean them up before applying for a mortgage.
4) Have your documentation ready
Be prepared to document your income. Most borrowers will need to provide at least two current pay stubs and tax returns for at least one year to qualify. The sooner you can get your signed application and documentation back, the sooner you can lock in a low rate should interest rates start to go up.
5) Get multiple quotes
You've heard it before - it pays to shop around. While most borrowers want to find the best deal on a mortgage when it comes to shopping most fall short. Many only speak to 1, maybe 2 lenders. Lenders rates can very substantially and fees can also be dramatically different. So, when shopping be sure to talk to at least 3 lenders and use the APR to compare mortgage deals. When a lender quotes you an interest rate they must also provide you with an APR – Annual Percentage Rate –the rate you will pay to get the loan through that lender including all fees and closing costs. It's best to compare the APR when choosing between mortgage loans because it includes the costs of obtaining a mortgage in the interest rate. That way if one lender has low rates but high fees it will be reflected in the APR.
6) Consider an adjustable rate mortgage (ARM)
Taking out a traditional 30-year fixed-rate mortgage might not make financial sense for all homebuyers. It might save you money if you lock in a lower rate for a shorter period of time, such as five, seven or 10 years. A so-called adjustable-rate mortgage is an option to consider, although you need to be aware that the interest rate could increase after the fixed period ends and the rate readjusts.
For instance, a first-time buyer who hopes in five years to get the next job promotion to move or upsize (to a more expensive house). If they know going in that it’s not their forever house, they can save a little money while they’re there because the ARM loans should be at a better rate than the 30-year fixed.
7) Good faith estimate
While lenders will quote you rates over the phone or in some cases via email, it’s not a real rate until you get it in writing. The lender should provide you with a Good Faith Estimate (GFE). The GFE will include the interest rate you’ll be paying, the APR and a list of all closing costs and fees. Keep this handy and get a GFE from at least two different lenders for comparison purposes. Have the GFE with you when you sign your loan docs and be prepared to not sign the loan agreement if the interest rate, APR, closing costs or fees are not what you were promised in your GFE. There will be slight variations as the GFE is a Good Faith Estimate, but it should not be off by that much.
8) Lock in your rate
Once you've found the best deal on a mortgage it's important to lock in your rate. When you lock in your rate, you are getting the lender to guarantee the rate quoted for a set period of time whether rates go up or down. This protects you! If rates go down you can always let the rate lock expire and grab the lower rate. However, you have the rate locked in should rates increase. Rate locks are usually for a period of 30 to 45 days. You’ll need to make sure you can get your application and documentation submitted to the lender with plenty of time to make it through their processing / underwriting department. Talk to your lender about rate locks and any fees that may be associated with them.