How to find the lowest home loan interest rate
When you’re starting out on your search it’s helpful to get a feel for what are today’s mortgage rates. You won’t know if you’re being offered a good deal if you don’t have a sense of what’s happening in mortgage markets. One way to find out what’s happening in mortgage markets is to check Freddie Mac’s Primary Mortgage Survey, which surveys lenders weekly on their mortgage products and posts the average mortgage rates.
Keep in mind, however, that the survey tracks rates offered to prime borrowers making 20 percent down payments. Borrowers with flawed credit or those making smaller down payments, can expect to pay higher rates.
Once you know the average mortgage rates, you’re ready to do your research. Mortgage lenders are always looking for customers, and they tend to make it easy for you to see what mortgage rates they are offering.
You can typically find a listing of current mortgage rates on a lender’s website. There are also websites that compile the mortgage rates of multiple lenders so you can compare them. Keep in mind that you may not actually qualify for the rates advertised on comparison sites.
Who has the best mortgage loans?
With this much information at your fingertips, you can get a general idea of which banks are offering the highest rates and which are offering the lowest. At that point, you might be tempted to narrow down your list of lenders to only consider those with the lowest advertised rates.
But as you explore your options, keep in mind that the best mortgage rate doesn’t necessarily mean you’re getting the most affordable mortgage loan.
Some lenders may make up for offering a lower interest rate by charging you a larger origination fee. You can also buy down your interest rate by purchasing “points” to get a lower home loan interest rate.
Also keep in mind that a loan may start off with an extremely low-interest rate, but the interest rate could rise over time if you select an adjustable-rate mortgage (ARM). Many people find ARM loans appealing because they typically have lower interest rates at the beginning of the loan term than fixed-rate mortgages, which keep the same interest rate for the life of the loan.
But with ARM loans, looks can be deceiving. A lender may offer you the choice between a fixed-rate loan with a 4.5% interest rate and an adjustable-rate mortgage with a 3.75% interest rate. On the surface, you might think that the 3.75% rate is the better deal.
However, an ARM loan is tied to an index, which is a benchmark interest rate that can rise or fall. That means your ARM loan’s interest rate can rise or fall over time. Say the interest rate on your ARM loan rises to 5% or 6% over time. You could potentially end up paying more in interest for the ARM loan than you would for the 4.5% fixed-rate mortgage over the life of the loan.
Can you negotiate a better mortgage rate?
When you’re speaking to a lender, if you don’t like the rates that are being offered, simply ask if they have a better rate. One way to get a better rate is to pay for it by buying points. Lenders will often give you the option of paying more upfront in order to get a lower interest rate. Each point costs 1% of the mortgage, so if you had a $150,000 loan, a point would cost $1,500. The more points you buy, the lower the interest rate you’ll have to pay on the loan.
Is this a good idea? It depends largely on how long you plan to stay in your home. If you have a lot of cash on hand, paying for points could lower your monthly payment and save you money in interest. But if you sell your home or refinance your mortgage before you recoup the money you paid up front to get a lower interest rate, you probably won’t break even.
The interest rate isn’t the only thing you should look at when comparing mortgage rate offers. You also want to see how much you will be expected to pay in closing costs. Typically closing costs can run anywhere from 2% to 5% of the loan, and they cover such charges as appraisal fees, underwriting fees, tax service provider fees, title insurance and government taxes. Closing costs might also include prepaid fees, such as homeowner’s insurance and property taxes. On a $200,000 mortgage, 5 percent would be $10,000.
When you are shopping for a mortgage and comparing rates, also compare the closing costs you will be expected to pay. You can compare the interest rates and closing costs from different lenders by looking at the Loan Estimate (LE), which should clearly lay out the interest rate, estimated monthly payments, and closing costs. The LE is provided to you within three business days of applying for the loan. Some lenders may waive certain costs such as the application fee. If the real estate market is competitive, you may also be able to get the seller to pay some of the closing costs in order to complete the transaction.
If you don’t have an extra $10,000 or so on hand for closing costs, some lenders offer no-closing-cost mortgages. Instead of having you pay for your closing costs upfront, lenders will either wrap the closing costs into the loan, which means you’ll have a higher principal to pay back, or they will pay the closing costs and charge you a higher interest rate to recoup the fees.
If you don’t have a lot of cash on hand, it might be a good deal for you to pay a higher interest rate to avoid paying closing cost fees upfront.
How much should I put down to get the lowest home loan rates?
Another factor that can determine the mortgage rate you get is the amount of money you put down on your house. A down payment is a percentage of the home’s price that you pay to the seller while the lender pays the rest. Most lenders require that you put down at least 3% on a house. On a $200,000 house, that would be $6,000.
There are also some zero-down mortgage loans. For example, VA home loans, which are available to current or former military service members, do not require a down payment.
While it is definitely possible to buy a house while putting little or no money down, you might not get the best mortgage rate that way. The less money you put down, the riskier lenders believe the loan to be. That’s because you have less of your personal money to lose if you default on your loan, and the lender is forced to foreclose on your home.
If you put down less than 20%, you will usually be required to buy mortgage insurance, and some lenders charge additional fees or a higher interest rate on top of that.
If you can afford to put 20% down on the house, not only will you have less principal to pay back, but you may have better options when it comes to the mortgage rates that are available to you.
If you’re refinancing your mortgage, lenders will also consider your loan-to-value ratio, or LTV. You can think of the LTV as the flip side of a down payment. Lenders will rarely refinance more than 97% of the assessed value of your home.
So if your home is valued at $200,000, the biggest mortgage refinancing amount you could be approved for would be about $194,000. If you want to take cash out of your home, the maximum LTV will typically be closer to 80%. So if your home is valued at $200,000, you would only be able to refinance about $160,000.
Special programs to find low-interest home loans
As you shop around for the best mortgage rate, you may find that you are eligible for certain programs that can help put home ownership within reach. While some programs provide access to loans with low interest rates, others offer other ways to save money. The following are some programs backed by the federal government:
FHA loans are backed by the Federal Housing Administration, an agency that is part of the U.S. Department of Housing and Urban Development. They require a down payment of only 3.5 percent and have lower credit requirements than many conventional loans.
VA loans are backed by the Department of Veterans Affairs. You may qualify if you are a veteran, current service member or a surviving spouse. While you may be able to get a VA loan with a zero- or low-down payment, you may have to pay an upfront funding fee when you close.
The U.S. Department of Agriculture offers USDA loans to low- and moderate-income borrowers who purchase a home in rural communities. While zero-down loans are available, your household income must meet certain guidelines and the house must be in an eligible rural area. You’ll also have to pay an upfront fee.
There may also be state and local programs that can help you to get the best deal on a house. Check with your state’s housing finance agency to see if you are eligible for any of them. The website Down Payment Resource offers an online tool that lets you see whether you qualify for a homeowner assistance program.
You should also check with local HUD-approved housing counseling agencies. These organizations offer advice and help consumers navigate the home buying process. They will likely be able to let you know about special programs that you may be eligible for that can make the home buying process more accessible.
When you’re shopping for the best mortgage rate, take your time to gather as much information as you can about current interest rates, lenders’ policies, and special programs. Knowledge is power. The more you know, the more you can save.
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