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How to Get the Best Mortgage Rate
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When you're shopping for a mortgage loan, you’ll be presented with both an interest rate and an annual percentage rate (APR).
The interest rate charged by the lender is the primary cost of borrowing money. It's how much you pay in interest charges each year when you take out a home loan, expressed as a percentage. The lower the mortgage interest rate, the lower your monthly payment and total repayment costs.
However, the mortgage interest rate doesn’t reflect points, mortgage broker fees, and other charges you may pay when taking out a home loan. To help you understand the impact of these additional fees and expenses, lenders are required to factor them in when calculating your APR.
Think of the APR as the effective interest rate over the life of your mortgage; it is the rate you’ll pay when you factor in the points, fees and other charges you pay. This allows you to compare rates between loans and lenders as some loans and lenders have more fees than others. The best way to understand the difference between the interest rate and the APR is that if a loan has no fees, then the interest rate and APR will be the same.
When shopping for mortgage rates, it's a good idea to compare the interest rate to the APR. The more fees and expenses you’re being charged, the greater the difference between the interest rate and APR.
You'll receive a disclosure called a loan estimate1 after you submit your application. When comparing your loan options, look for the interest rate on page one under “Loan Terms,” and the APR on page three under “Comparisons.”
If you're considering an adjustable-rate mortgage — an ARM loan — remember that both the interest rate and the APR can increase (or decrease), along with your monthly mortgage payment and total repayment costs.
Shopping for a better mortgage loan rate can save you thousands of dollars2 over the life of your loan. But the interest rate is not the only consideration when comparing home loans.
It's also important to consider lender charges, credits, and fees3.
Sometimes borrowers who know they’ll be in their home for many years will agree to pay “points” in exchange for a lower interest rate. But keep in mind that if you pay up-front fees to buy down your interest rate, it can take years to reap the benefits. A mortgage calculator can help you estimate how long it will take to break even If you're thinking about buying down your interest rate by paying points or fees.
Or, borrowers who only expect to be in a home for a short time may agree to a loan with a higher interest rate in exchange for lender credits — money that helps pay their closing costs so they pay less up front. If you accept a loan with a higher interest rate in exchange for help paying your closing costs, remember that you’ll continue to pay for that convenience for as long as you have your loan.
Credible provides transparency into the rates and fees available to qualified borrowers in real time, without affecting your credit score or sharing your personal information with lenders until you see an option you like.
To find the best mortgage rates, it's important to compare rates from multiple lenders. The rates that you'll qualify for depend on each lender’s methods of evaluating your unique circumstances. These include:
- Income
- Credit history
- Location and value of the home you're financing
The size of the down payment you're able to make — or how much home equity you'll have after refinancing into a new mortgage — can also be a factor.
If you’re looking for a “jumbo mortgage” that exceeds Fannie Mae and Freddie Mac’s conforming loan limit, you can expect to pay a higher interest rate. The 2019 conforming loan limit for single-family homes in most markets is $484,350, although it can be as high as $726,525 in high-cost markets. Larger loan amounts are formally classified as non-conforming loans, and are informally referred to as jumbo mortgages.
Traditional banks and credit unions may offer competitive rates, but it’s also a good idea to check with direct mortgage lenders and mortgage brokers. Mortgage brokers work with multiple lenders and can help you evaluate your loan options. Just be sure to pay close attention to fees as well as rates. Real estate agents often have lenders they prefer to work with, but before taking out a home mortgage from a lender you’ve been referred to, make sure you’re not being overcharged.
Many home buying and mortgage comparison websites provide average rates or rate estimates that are based on self-reported credit scores. These rates can be far off the mark, and comparison sites often provide little or no information about fees.
Credible is integrated with lenders and credit bureaus, providing actual prequalified rates in minutes without affecting your credit score. You also get full transparency into fees, and your personal information isn't shared with lenders until you're ready to proceed with an option you like.
Mortgage interest rates are driven by market forces and can change on a daily or even hourly basis. Once you are ready to accept a loan offer, you may want to secure the rate by requesting a “rate lock.” If it's not locked, it can change at any time.
Lenders typically offer rate locks for periods of 30, 45, or 60 days. If you need to extend a rate lock, you may be charged an extension fee.
Even if your rate is locked in, your rate may change if your credit score or other information you provided changes when the lender goes to verify that information (your income or your debt to income ratio may change, for example). Your rate can also change if you decide to get a different type of loan or make a smaller down payment.
Once you take out a fixed-rate mortgage, the interest rate remains the same for the life of the loan. If you take out an adjustable-rate mortgage (ARM) loan the initial interest rate can adjust every year after an introductory period of three, five, seven or 10 years, depending on the type of ARM chosen.
Lenders primarily look at four main criteria when evaluating whether you qualify for a loan:
- Minimum credit score
- Minimum down payment
- Maximum debt-to-income ratio
- Maximum loan-to-value ratio
These requirements can vary from lender to lender, but are largely dictated by the mortgage finance giants Fannie Mae and Freddie Mac, or the Federal Housing Administration (FHA) or Veteran’s Administration (VA) for borrowers taking advantage of government-provided mortgage insurance.
Minimum credit score
The lower your credit score, the higher the interest rate you can expect to be offered by lenders. If your FICO score is below the 620 minimum set by Fannie Mae and Freddie Mac, you may still be approved for an FHA loan with a credit score as low as 500.Minimum down payment
To qualify for the lowest interest rates on conventional mortgages not insured by the FHA or VA, homebuyers will typically have to make a down payment equal to 20% of the home’s value. Fannie Mae and Freddie Mac require mortgage borrowers making smaller down payments to have private mortgage insurance, an additional cost that allows for down payments as low as 3%.The minimum down payment on FHA loans for borrowers with credit scores of 580 or higher is 3.5%. But FHA loans with minimum down payments of 10% are available to borrowers with credit scores as low as 500. Veterans may qualify for VA loans, which can be used to purchase a home with no down payment.
Maximum debt-to-income ratio
Your debt-to-income ratio (DTI) represents the percentage of your monthly income that's required to meet ongoing expenses such as rent, utilities, car payment, and credit card bills. While mortgage lenders prefer that your DTI not exceed 36%, Fannie and Freddie will approve loans with DTIs of up to 45% or 50%. FHA-approved lenders will go all the way up to 50% in some cases.Maximum loan-to-value ratio
The loan-to-value ratio (LTV) of a loan reflects how big the mortgage is in relation to the value of the home you’re financing. If you're putting 20% down on a home, the mortgage represents 80% of the home's value. For borrowers who are interested in cash-out refinancing, maximum LTVs are typically 80%. A new mortgage with an LTV of 80% will leave you with 20% home equity.When purchasing a new home, getting preapproved for a mortgage is the first step toward home ownership and helps you determine the maximum home price you can qualify for. To become preapproved or prequalified, you'll typically have to provide some basic information about your income and finances and agree to a credit check. Getting prequalified can help you make an offer on a home, and provides a good idea of the rates you'll qualify for. But a mortgage preapproval or prequalification letter is not a guaranteed loan offer.
Credible makes it easy to request prequalified rates from multiple mortgage lenders. You fill out one form, and Credible's integrations with lenders and credit bureaus can provide real prequalified rates and fees without harming your credit score or compromising your personal information.
Credible uses a "soft credit inquiry" to generate prequalified rates from multiple mortgage lenders without affecting your credit score. If you see an option you like from a particular lender and want to apply for that loan, a hard credit inquiry will be performed. A hard credit inquiry will usually have only a minor impact on your credit score — typically no more than 5 points, but it can range from 2-7 points.
Many mortgage lenders also use a hard credit inquiry to provide a mortgage prequalification or preapproval letter. To protect your ability to shop rates, hard inquiries received from multiple mortgage lenders within a 45-day window are counted as a single inquiry.
Many mortgage comparison websites provide rate estimates that are based on self-reported credit scores. These rate estimates don’t require a credit inquiry, but will be less accurate than prequalified rates.
Once you've compared rates from multiple lenders and selected an option that's right for you, you'll be asked to verify your identity and income when you apply. Documents you may be asked to provide include:
- Drivers license
- Social Security card
- Your two most recent bank statements
- Signed tax returns for the last two years
- Two years of W-2 forms
- An estimate of the home’s value (an appraisal or recent sale price)
- Documentation of the source of funding for your down payment (for home purchase mortgages)
- For new home purchases, you’ll also need to submit the home purchase contract.
If your application relies on income from sources other than a job, such as child support or rental income, you'll need documentation showing you can expect to continue receiving it.
Credible simplifies the loan application process. Much of the documentation required by mortgage lenders — such as pay records, bank statements, and tax transcripts — can be gathered electronically, instantly and securely without leaving the Credible site.
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