How to Find the Best Mortgage Rates

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|10 min read

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How to find the best mortgage rates

Buying a house is a new and exciting venture in your life. The next few months will be spent house hunting, making offers, and (eventually) picking out paint colors and other interior design elements. However, before you can start daydreaming about your future bungalow or townhouse, you need to get through the financial paperwork. This means finding a lender who will give you a mortgage and offer favorable rates. 

Your mortgage rates will play a significant role in your monthly costs. Even small variations in mortgage offers can save you thousands of dollars over the course of your loan. Use this guide to learn how to find the best mortgage rates and what different terms, fees, and line items mean.

What makes up a mortgage? 

Before you can find the best mortgage rates, it helps to understand the different elements that make up a mortgage payment. This way you can consider the offers available to you and see which lenders are more expensive than others. Here are the basic components of a mortgage:  

  • Principal: this is the amount you need to borrow to pay for your house. This number should not change from one loan offer to the next. 
  • Interest: this is the price of the loan. This is one of the most important numbers to look at. The higher risk that your lender perceives your loan, the higher the interest rate will be. 
  • Escrow: this is an account your lender often sets up to cover various costs related to your loan. For example, they might use your escrow account to cover the cost of higher home insurance premiums or property taxes. 
  • Private mortgage insurance (PMI): if your down payment is less than 20% of the home’s value, your lender will charge private mortgage insurance. This is extra insurance on the loan that will be canceled once you hit the 20% threshold.  

Your mortgage payment might also include your homeowner’s insurance rates, property taxes, and homeowner’s association fees. However, these costs are not controlled by the lender and you won’t get a better mortgage rate by focusing on these costs.

Understanding Interest Rates

If you want to find the best mortgage rates, you need to focus on the interest rates offered by different lenders. Banks and credit unions use internal algorithms to evaluate the level of risk that comes with your loan. A few factors that contribute to risk include:

  • Loan size: a $300,000 loan is riskier to the bank than a $200,000 loan because the bank stands to lose more money.
  • Percent of home value: a loan that makes up 75% of the home’s value is riskier than one that only makes up 50% of the home’s value. The bank needs to recoup a greater percentage of the current assets. A larger down payment can result in a cheaper loan.  
  • Credit score: a borrower with a lower credit score is considered riskier than one with a good financial footprint. 
  • Debt-to-income ratio: a borrower is statistically less likely to miss payments if the monthly payment is a smaller portion of their regular take-home pay. 
  • Collateral: if you have other assets (like a retirement account or investment funds) you might secure a better mortgage rate because these items can be used as collateral if you default on your loan. 

Banks have different weights for various factors related to your financial profile and loan application. They will run your numbers through their system and propose an interest rate for your loan.

Small Interest Rate Changes Impact Your Monthly Mortgage Payment

It’s worth the time and effort to learn where to find the best mortgage rates for your home. Even small percentage changes in your interest rates can raise or lower your monthly mortgage payment. 

The team at Rocket Mortgage highlights how a 1% change in interest rates can increase a mortgage payment by $100 each month – more than $1,000 each year. If the borrower has a 30-year fixed-rate mortgage, the savings with a lower interest rate could be enough to buy a car or attend college over the course of the loan. 

In some cases, a higher-than-expected interest rate could push your debt-to-income ratio out of the limits of the mortgage lender, leading to a declined loan. Shopping around for loans could be the difference between buying a house now and waiting a few years.

Federal Interest Rates Will Play a Role in Your Loan Offers

Oftentimes, interest rates get confusing when buyers hear about the Federal Reserve raising or lowering its rates on the news. The Federal Reserve does not set mortgage rates; however, when the Fed raises its interest rates for borrowing, banks and credit unions often raise their own rates as well. This is why your mortgage application will result in a higher mortgage interest rate offer after the Fed raises interest rates. Your lender is just responding to macroeconomic trends. 

You don’t have to be a financial expert to secure a mortgage. It just helps to know there is a correlation between the cost to secure a home loan and the economic risks perceived by the Federal Reserve.

How to Find the Best Mortgage Rate

All of this information about interest rates is meant to empower you to make better decisions when considering loan offers. If you can’t review a loan and understand what the lender is charging, you won’t be able to choose the best offer for your needs. Here are a few ways to find the best mortgage for your home purchase.

Present Your Finances in the Best Light

Before you start shopping for loans, pull any possible financial document that your lender could ask for and that could make your finances look stable. You will need bank statements, tax forms from past years, pay stubs, and proof of any assets that you have. 

>>MORE: Finding a top real estate agent is easy with FastExpert. Browse agent listings today.

During this time, do your best to improve your credit score and eliminate unnecessary debt. This increases your chances of securing favorable mortgage rates. Be prepared for lenders to pull a credit report early in the application process.

searching for best mortgage rates

Choose the Best Mortgage Type for Your Home

Different mortgages have higher and lower levels of risk. If you take on a riskier mortgage, you can expect to receive higher interest rates. Talk to your Realtor or personal finance expert about your mortgage options, including a fixed-rate mortgage vs. an adjustable-rate mortgage. You need to choose a loan that matches your lifestyle needs while still securing favorable interest rates.

Shop Around for Lenders

The best way to compare mortgage rates is to seek estimates from multiple lenders. This process might be time-consuming, but you can save hundreds of dollars each year by considering multiple loans. Reach out to your bank, local credit unions, and national mortgage companies to discuss your loan. Different types of banks might perceive levels of risk in varying ways, which results in differing mortgage rates.

Look at the APR vs. the Internet Rate

The interest rate is a valuable metric to evaluate loan offers, but one number is even more important: the annual percentage rate (APR). This is the interest rate changed by the bank plus all of the other costs and fees added by the lender to secure your loan. 

Some lenders will specifically offer a lower interest rate to lure borrowers who don’t check the APR. Consider the two loans below:

  • 2.9% interest rate at a 5.5% total APR
  • 3.8% interest rate at a 5.0% total APR

While you will pay a higher interest rate in the second example, the total cost of the loan will be cheaper because of the APR. Focus on this number when shopping for mortgage rates.

Start the Comparison Process When You Are Ready to Buy

Interest rates fluctuate throughout the year, which means a loan estimate your receive in January will be outdated in September. You don’t want to build your financial hopes on an outdated application. 

While you can start browsing home listings in your area at any time, start securing loan offers when you are actually ready to buy. You can get pre-qualified with a lender and then pre-approved when you are ready to make an offer. 

The home-buying process is fast and requires a lot of paperwork and planning. Be prepared to evaluate multiple loan offers and choose the best interest rate for your needs.

Know What it Takes to Get the Best Mortgage Rate

Once you have a clear understanding of your expected down payment, loan amount, and debt-to-income ratio, you can meet with mortgage lenders to review their loan offers. You don’t need an be an accountant or financial genius to review mortgage applications. Once you have a clear understanding of what the bank is charging, you can see whether a mortgage loan is right for you. 

If you need help navigating the world of mortgage lenders, work with a Realtor you can trust. At FastExpert, we pair buyers with some of the best Realtors in their area. This gives future homeowners the confidence they need when making offers and reviewing contracts. We have an advanced algorithm that can help you find the best agent to meet your needs. Try FastExpert today and meet some of the top real estate agents in your area.

Amanda Dodge

Amanda Dodge is a real estate writer and expert. She has worked in the field for more than eight years. She spends her time writing and researching trends in real estate, finance, and business. She graduated with a bachelor's degree in Communications from Florida State University.

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