RP Funding: Mortgage Rates – Make Sure Yours Is as Good as It Gets
All mortgages are not created equal. In fact, with countless options, rates, and terms to choose from, there’s a lot to consider in finding the right one for you. A great place to start is by taking a look at mortgage interest rates, understanding what they are, how they are offered, and how that number determines so much when it comes to getting the best mortgage loan available.
Lenders offer different rates to different customers, and the rates you’re offered may vary greatly from one lender to the other. Because the rate you lock in can significantly affect your monthly payments, as well as the amount you pay over the life of your loan, it’s important to get the best deal possible, right from the start.
So, whether you’re shopping for a new mortgage or want to get a better rate on an existing loan, here are some things you need to know to get the best mortgage rate possible.
What Rate Will You Be Offered?
Your credit score plays a big part in the rate lenders offer you. Put simply, the higher your credit score, the lower the interest rate.
To give you an idea of what this could mean, FICO offers a loan calculator that estimates monthly payments on a 30-year, fixed-rate loan. If your FICO score is between 760-850, your interest rate is estimated to be 3.819 percent. If your score is between 620-639, you’re looking at a rate of 5.408 percent. On a $300,000 loan, that’s a $1,401 monthly payment for the best credit scores and a $1,686 payment for the lowest. As you can see, that’s quite a difference.
Lenders also take into account your employment history (how long you’ve held your job), your income, and the amount of debt you have (your debt-to-income ratio), as well as the amount of your down payment (20 percent for the best rates).
You Better Shop Around
But even when all of these factors are the same, there are still no standard rates among lenders. That means you’ll have to shop around to get the best one, something which far too many people fail to do. In fact, according to the National Association of Realtors, two-thirds of home buyers take the very first mortgage they’re offered.
“This is a huge mistake,” says Robert Palmer, real estate expert, CEO of RP Funding, and host of the Saving Thousands radio show. “Think about it. If the first lender you choose is going to overcharge you by $5,000, or even $10,000, you would never know because you have nothing to compare the fees and interest rate to.”
Palmer suggests homebuyers select three lenders to consider and get quotes from each. While your real estate agent may have a preferred lender, you’ll also want to seek out quotes from a couple of others as well. There have even been cases in which real estate agents have received illegal kickbacks and fee splitting in return for recommending clients to certain lenders.
“If your real estate agent’s preferred lender is giving you the best deal, then they should have no problem with you shopping around,” Palmer says. “In fact, they should encourage it. You owe it to yourself to do your research and shop around. Doing your homework can protect you from being overcharged and taken advantage of.”
It’s also important for homebuyers to let each of the lenders know they’re shopping around in order to encourage each company to provide its best rate — a little competitive incentive. Also, no lender should ever charge for a quote. If one does, that’s a red flag to keep shopping.
As you’re shopping around, you should know just what you’re shopping for as there are numerous options when it comes to loan types.
While a 30-year-fixed rate mortgage may be the most popular, it isn’t right for everyone. For example, if you’re not going to be in your home for years and years to come, then you may want to consider an adjustable-rate mortgage, which offers low initial interest rates. You have to be quite certain you’ll be selling before the rate adjusts, but if you are, this might be an option to explore. Other options include shorter-term fixed rate loans, hybrid loans, FHA and VA loans, interest-only mortgages, and balloon mortgages.
Narrowing down all the options is no simple process, and your agent can help so that you’re comparing apples to apples when shopping for the best rate.
Buyer Beware of Lender Fees
One thing you must consider when shopping for a mortgage is the fee some lenders charge. Palmer doesn’t believe buyers should have to pay to get a mortgage, yet many lenders require it.
“Most mortgage loan officers and brokers only close one or two loans per month, so to make a living they need to make thousands of dollars in commissions on each loan they close,” he says. “These commissions are earned through a combination of charging upfront fees and higher interest rates to earn ‘kickbacks.’”
When looking at a good faith estimate each lender will provide, it’s tempting to just pick the one with the lowest interest rate. However, if that low interest rate comes with higher fees, it will likely be more expensive in the end. Money not spent on fees can be used to reduce the amount of the loan balance. Paying a fee essentially doubles the cost because of the fee plus all of the interest you’re going to pay for the life of the loan on the extra money you borrowed.
Palmer also cautions buyers to beware of deals that sound too good to be true.
“Some unscrupulous companies will quote you anything over the phone and then when it comes time to give you the real figures, usually after you have spent your hard-earned money on an appraisal, the deal suddenly changes,” Palmer says. “Beware when dealing with some unknown voice on the phone.”
So, whether you’re looking for a new mortgage or simply want to make sure your current one is the best you can get, make sure you do your homework and work with your realtor. Your mortgage is likely one of the biggest financial transactions of your life. Make sure you’re getting the best deal possible.