How to Find and Compare the Best Mortgage Rates
If I were to tell you that trying to find and compare the best mortgage rates is a difficult task, you might say that's hard to believe. Your argument might be that all you have to do is go to a popular website like bankrate.com and all of the mortgage rates are right there for you to see. One of the things you don't see, however, is the cost to obtain the loan. Further, rates are subject to change. The rates are not guaranteed.
Not surprisingly, each financing situation is somewhat unique. There are underlying factors that determine what kind of mortgage rate you might be able to ultimately obtain. Some of those things are:
- Purpose of Mortgage Loan. Is your loan to purchase a primary residence, a second home, a rental, or is it a cash-out refinance, which is different from a plain refinance. A cash-out refinance is often at a higher interest rate than a refinance that pays off an existing loan and does not give cash to the borrower.
- What Is the Loan-to-Value Ratio? Often, highly leveraged loans carry a higher interest rate. Lenders assign risk factors to loans, and a lower loan-to-value ratio is less risk for a lender. For example, if you are putting down 50 percent in cash to buy a $200,000 home, your loan would be a 50 percent loan-to-value ratio. If you were to default on the mortgage, the lender is protected by the large amount of equity.
- What Is Your FICO Score? The higher your rating, the more favorable interest rate you will receive. The lender uses a different engine to determine FICO scores than you can get from the 3 credit reporting agencies.
- How Long Have You Worked at Your Job? Recently a home buyer was blocked from buying a home because her employer was a temporary agency, and her mortgage loan officer failed to notice that her payroll stubs did not reflect the name of the company where she worked. She was 3 days away from closing when she discovered her loan was rejected.
- Do You Have Derogatory Credit? Have you (or a former spouse) ever filed for bankruptcy, gone through foreclosure, completed a short sale or ever been delinquent on any loan? Loan requirements have tightened since the market crash of 2007. Lenders are not so lenient anymore and rarely overlook derogatory credit.
You cannot adequately determine most of these things from a website. You need to speak to an individual, a mortgage loan officer. I haven't listed everything an underwriter uses to determine whether you will be approved for a loan. There are many nuances that require a specialist's attention. Few people are really a slam-dunk in the mortgage business anymore.
Surprisingly, people who try to find and compare the best mortgage rates don't always end up with the rate they thought they would receive. On top of this, this might not receive competent advice, guidance nor competent loan packaging. Mortgage loan officers are like any other professional. You've got good, bad and everybody else in between.
Mortgage Rates Are Fairly Conforming
Just about every lender except private banking channels have access to the same bag of money. If your LTV is at least 80 percent and your FICO score exceeds 800, the rates for you will be similar from lender to lender. You might find a break in rates due to market conditions that change throughout the day, a new promotion or product. But it probably won't change much more than 125 percent. That's 1/8th of a point.
An 1/8th of a point on a $300,000 loan might result in a payment difference of $22 a month between 4.5 percent and 4.625 percent for a 30-year mortgage. You might say over 360 payments that would be almost $8,000, yet the truth is many people sell and move before 30 years. Or they refinance the mortgage. So that difference is generally not paid out over a 30-year term.
Further, lenders charge borrowers to make a loan. Those fees, often called points, discount points and origination fees, affect your mortgage rate. If you see a low mortgage rate advertised, there is probably a catch. Maybe it will cost you points to get that loan. Maybe that loan is not a fixed-rate loan, perhaps it is an adjustable-rate mortgage. Lenders might advertise this way so you will call them and they can reel you in, dangling smoke and mirrors. Ask questions.
Some borrowers like to use online mortgage lenders because they feel they can find and compare mortgage rates more easily online. Again, the online website probably does not disclose the entire story. There can be difficulties that pop up when using online lenders who originate loans in other states, too. I recently had a borrower working with an online lender out of Chicago. Chicago is two hours ahead of us in California, which caused communication difficulties. Also, the lender used an appraisal management company from Stockton when the property was located an hour away in Sacramento, which resulted in a low appraisal.
Instead of trying to find and compare the best mortgage rates, I suggest trying to find the best lender. The best lender is often local. It could be your credit union, where you bank or a mortgage lender recommended by your real estate agent. Real estate agents know which lenders close on time and take care to avoid mistakes. Make sure your mortgage loan officer is vested in providing the best service possible to you.
Also, don't keep watching interest rates after you've chosen a mortgage lender, wondering if there is a better loan out there somewhere. That will only drive you nuts. Most lenders I know will adjust your rate down if the market adjusts downward after locking a loan.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.