Mortgages: Shopping for the Best Rates
All those “record-low” mortgage rates have you watering at the mouth to buy a home or refinance your current one? Mortgage lenders adjust their rates based on perceptions of risk, so unless you can show you’re a low-risk borrower, you are unlikely to qualify for a rate that matches those seen in all the advertisements and headlines.
Consumers who want to try for the lowest rates available need to consider these basic factors:
Credit Score: The ideal borrower has a FICO score of 740 or higher. That puts you in the best place for pricing. According to MyFICO.com, borrowers with scores of 760 to 850 could qualify for an annual percentage rate of approximately 3.95 percent on a $500,000 30-year fixed-rate mortgage, while those with scores of 620 to 639 qualify for 5.53 percent.
Points: The lowest rates usually are decreased by paying a fee called a point, or 1 percent of the loan amount. You need to buy points in order to get the best rates at many banks. In Freddie Mac’s recent weekly survey on mortgage rates, points have averaged 0.7 percent on loans in the last year. Points might make sense depending on your financial situation and how long you expect to stay in a home. So ask for a zero point quote, too, and compare.
Down Payment: Borrowers who put down at least 25 percent are more likely to obtain “attractive pricing” at most banks. Lenders offer different breaks on rates if equity is higher, so you should ask what is available.
Loan Length: A lot depends on how long you plan to live in a home. If you’re likely to move in a few years, an adjustable-rate loan with a low interest rate fixed for, say, three to five years, and adjusted afterward, might work best. Also, rates on 15-year fixed-rate loans are lower than those on the 30-year — 0.77 percentage points, on average, last year.
Property Type: If you’re buying a duplex or a four-unit building, your rate will almost certainly be higher. Condominiums may also have a rate premium, especially if they are newer or your down payment is below 25 percent. Lenders charge more if you are not planning to live in the home. Commercial properties like apartment buildings have the highest rates, as they are considered riskier.
Borrowers may also be able to reduce their mortgage rate when they enter into a “lock-in” agreement with a lender. Lenders typically offer a lower rate for a shorter lock period.
Lenders typically agree not to change an offered interest rate for 60 days, but borrowers confident of a quick closing may be willing to accept a 45-day rate guarantee, or even a 30-day lock, in exchange for a small discount, because the transaction’s speed helps the lender reduce its risk.
Borrowers must make sure, too, that they consider the entire cost of a home, looking carefully at monthly payment calculations. About a third of homeownership costs are in addition to the mortgage — among them property taxes, insurance, maintenance and repairs.