Interest rates are at a historic low, but you still want to make sure you get the best rate you can. So how can you find the lowest mortgage rates?
When Homer Buyer started looking to buy a house, he first figured out what he could afford for a monthly payment. Once that was accomplished he needed to know how much he could pay for a house and have an affordable monthly payment.
He searched online for different lenders and got several quotes, but he came across some unfamiliar and often confusing terms.
They had abbreviations LTV, APR, PMI, PITI, FICO, GFE, RESPA, FHA, HUD.
He didn’t understand why some lenders offered a lower interest rate and yet had a higher APR. Which one was the better deal?
Homer decided he would get professional help to understand all the terms and how they affected him. He went to a local mortgage broker to get some answers.
The mortgage broker explained that the APR included the interest rate, but it also had other fees added in and averaged over the term of the loan. This provides a more accurate picture of the overall cost of the loan.
Some lenders offer a lower interest rate, but make up for the lower yield in front end fees The APR is a way
to include the fees to make a better comparison.
He also pointed out that these fees were spread out over a 30 year term in the APR on a 30 year fixed rate mortgage, but if he refinanced or sold the property in less than 30 years, the effective APR would be increased.
The mortgage broker was able to find Homer a better rate than either of the quotes he got from online lenders. He had access to many different lenders and knew which programs would give the best deal in Homer’s situation.
If you are having trouble finding the lowest mortgage rates, here are some tips:
- Check your credit report for errors before you start shopping for a mortgage.
- Know how long you plan to keep the home.
- Study the terms involved and know what they mean.
- Understand how to compare quotes.
- Get a copy of your credit report including FICO scores (you probably won’t get the scores free).
- Ask for quotes based on the report you have to avoid excessive inquiries affecting your score.
- Get quotes from several lenders and mortgage brokers.
It is important to be sure there are no errors on your credit report before you start shopping for a mortgage. Many credit reports contain errors that significantly affect the credit score.
The credit score is not only used to determine if you qualify for a mortgage, it also plays a part in determining the rate you will be offered.
If you plan to sell the house before the term of the mortgage, take this into consideration when comparing quotes. You can adjust the APRs for comparison on a shorter term.
Subtract the interest rate from the quoted APR
Multiply by the number of years in the term of the loan
Add the interest again
If you consider refinancing at a later date be sure to recalculate the costs based on the shorter term to determine whether refinancing is a good deal. Unless rates drop significantly, you shouldn’t refinance.
Don’t buy a house planning to refinance later. If you don’t think you can live with the loan you are offered for the term of the loan, you shouldn’t accept the offer.
Ask the lender to give you quotes based on a credit report you get yourself. Checking your own credit will not affect your score, but having lender’s check your credit will.
They will want to run your credit for verification before finalizing the loan, but you only get one hard inquiry after you have compared the rates and chosen the best deal.
Remember, Homer started his preparation to get the best mortgage rate by knowing what he could afford. If you don’t have any financial goals it is hard to determine a payment you can live with.
If you need help figuring out your monthly payment, start by creating a budget. Moneytree budget software can help. It walks you through creating a budget, setting financial goals for the future and tracking expenses.
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