You are thinking about buying a home. There are several things you need to do to get ready for your purchase. One of these things is to figure out what loan to use and who can offer you the best mortgage rate. But you need to understand that the rate is just one component of your loan costs, so the real objective is to get the best interest rate while minimizing your total loan costs.
What are Loan Costs?
In addition to the interest rate, several fees make up the total cost of your loan. Here are the components to consider besides the rate:
- Lender Fees – This the sum of all the fees that your lender charges you. Different lenders will have different names for the fees, e.g., loan origination fee, application fee, processing fee, etc. Typically, this amount is between $295 to $1,000; but I have once seen a fee as high as $9,000. Make sure you ask your lender about the fees!
- Discount Points – One point is equal to 1% of the loan amount. Some lenders will charge you point by default (e.g., a quarter of a point, half a point or a full point are common amounts), but most of the lenders I work with do not charge point except for certain specific situations. You can buy down your interest rate by paying the discount points.
- Type of Loan – What type of loan is it? Different type of loan has a different base rate and cost implication. You want a good lender who can help you compare each option.
- Funding Fee – Does your loan have a funding fee? For example, FHA Loans and VA Loans charge buyers a funding fee.
- Mortgage Insurance – If you put down less than 20%, your loan comes with a Private Mortgage Insurance (PMI). Depending on your loan, you can pay the PMI upfront at closing, or with your monthly payments.
Now that you understand the components that contribute to the cost of your loan, you can compare the mortgage rate correctly.
Steps to Get the Best Mortgage Rate
1. Start with Your Credit Union
If you are a credit union member, check with them first. A credit union will often provide its members with more competitive rates than the open market. You can also check with the bank you’re currently using, but in general, I find that banks are not competitive against lenders that specialize in home loan origination.
This is just the first step, though. You still want to find the best deal, so keep reading.
2. Ask for a Referral
Ask your Realtor, friends, family members, coworkers, and neighbors for a recommendation. If they know someone good, they’ll tell you.
As a professional, I know it is not a one size fit all thing — there is no one best lender for every situation. When a client asks for a recommendation, I evaluate their needs and help them find the best lender for their specific case.
3. Check Online
You could also check online to find the best rate. Usually, you will run into websites that send your information to multiple lenders to compete for your business. Therefore, get ready for an onslaught of phone calls and emails from companies that got their hands on your contact information.
Although you might be able to find a better rate online, understand that some of these lenders are not familiar with your local real estate market and law. This lack of local knowledge could delay your closing. For instance, I had a case where the lender requested documents that I knew weren’t required, but they insisted on having them anyway. In another example, the closing was delayed because the investor refused to fund the deal until after the closing is done, but in Virginia, the title company must have the fund before they can do the closing.
Last but not least, be sure to check out members-only offers.
- Private Banking/Wealth Management – In my years working as a Realtor, I came across two clients (out of about 150) that got way below market rate. How did they do it? They’re high net worth individuals, and their relationship with the wealth management company gave them access to exclusive mortgage deals.
- Costco – Yes, Costco! Costco partners with lenders across the country to bring their members some of the most competitive lenders. If you’re a member, check out their mortgage program.
- Employer – Does your employer participate in any special program? For example, when I used to work for Xerox, we had access to an employee-only Credit Union, which gave us a better mortgage rate.
- Associations and Schools – Also, check in with all your associations to see if any of them have a members-only discount.
Things You Can Do to Get a Better Rate
For the same loan, there are actions you can take to lower your interest rate even more.
- Put More Money Down – When you pay less than 20%, you have to pay PMI or pay for the PMI upfront. Depending on the loan, you could further reduce your rate by putting more money down.
- Improve Your Credit Score – You want your credit score to be as high as possible. As your credit score goes up, your interest rate will drop.
- When you’re shopping around, be sure to do all your rate shopping within 30 days. Regardless of how many credit checks you made, it will count only once against your credit score.
- The interest rate fluctuates throughout the day. When you are trying to make a final decision between two competing lenders, be sure to ask them for the rate on the same day.
- As your lender for closing cost and monthly payment worksheet to help you compare different loan options or different lenders.
Taking out a home loan is a big commitment, so don’t rush into it. Get a feel of the market rate, but understand that you may not qualify for the best interest rate. Getting the best rate depends on many factors, including your credit score, down payment, and who you choose to work with. If you can’t get the rate and terms that you want, you may have to delay your purchase while you work on improving your credit score or increasing your savings.
Pinyo is a full-service Realtor with Berkshire Hathaway HomeServices PenFed Realty and an insurance agent with McEvoy Insurance & Financial Services. He specializes in representing clients in the purchase and sale of residential and investment properties throughout Virginia and Maryland areas around DC.