For many Americans, a mortgage represents the largest long-term debt obligation they’ll ever have in their lifetime. For this reason, shopping around for the lowest mortgage rate you can get can save you thousands.
If you're getting a 30-year mortgage, the difference between a rate of 4.0 and 3.75 percent amounts to more than $5,000 for every $100,000 you borrow. Securing a better deal on your mortgage is key to reducing the overall costs of homeownership. The same goes for refinancers looking to get lower interest rates.
Let’s discuss how you can lock in the best possible rate that will pay off in the long run.
Why Are the Mortgage Rates Different With Each Lender/broker?
Today, interest rates are at historic lows indicating that economic factors and government monetary policy influence overall mortgage rates. However, the interest rate you'll be offered is determined by many factors, some of which lie outside your control, which is why you'll find rates differ by lender.
Mortgage rates vary from one lender to another because different institutions have different appetites for risk. Those with a high-risk appetite tend to offer friendlier interest rates and might be willing to work with borrowers with less than stellar credit. Mortgage bankers and managers have different backgrounds, experiences, and perspectives, which means human factor is an inevitable part of the mix.
However, the crucial factors that influence lenders’ interest rates the most are:
- Lender overhead costs: a lender's overhead costs structure is a significant factor in determining whether they're able to offer more favorable interest rates or not. Those that manage to keep their overhead low are more likely to offer better mortgage rates.
- Closing costs: getting a mortgage isn't free. Closings costs are the fees charged over the purchase price of a property. They typically include real estate commissions, taxes, insurance premiums, and title filings. While most closing costs are outside a lender's influence, the amount they charge for origination and underwriting of the loan will greatly determine the interest rate offered.
What Is the Difference Between a Mortgage Bank and a Mortgage Lender?
With so many lending institutions in the business, you might feel analysis paralysis when shopping for interest rates. Two of the most common institutions include large banking establishments, like JPMorgan Chase and Well Fargo, and non-bank mortgage lenders, such as UpEquity.
Each of these lending institutions can offer you the funds you need to buy a home, but they each come with a set of unique advantages. The right lender will depend on your individual circumstances. Still, it's important to remember that the ultimate goal is to save money by getting the best interest rates possible.
Which is right for you?
Banks and other lending institutions are generally free to determine the interest rates they charge for loans. However, two factors largely determine the mortgage rate you'll be approved for.
- Credit scores – Your scores are an indicator of your risk as a borrower. A higher credit score shows a history of financial reliability, which can prompt lenders to offer you lower interest rates.
- Down payment amount – Lenders consider those who put less than 20 percent down high-risk borrowers (especially on conventional loans). As a result, you might get higher interest rates, and you'll usually have to pay for private mortgage insurance, which can considerably increase the costs of owning a home.
What Is the Difference Between Points and Interest Rates?
Mortgage interest rates are the cost of borrowing money or the rates of return for the lender. On the other hand, mortgage points, or discount points, are fees paid to the lender to reduce interest rates. Sometimes referred to as "buying down the rate," each point can cost 1 percent of the mortgage loan amount. Though it depends on the lender, mortgage points can lower the interest rate by one-eighth to one-quarter of a percent.
Buying a house is one of the most expensive purchases most people will ever make, so naturally, anything that can reduce the interest rate is worth looking at. You can buy more than one point or even a fraction of a point. But remember that you'll pay the costs of your points at closing.
When discussing points, make sure you don't confuse discount points with ‘origination points.’ Origination points are fees that you pay to the lender as part of closing fees and costs. Don't worry, you'll be told about them in advance by your lender!
What Is the Difference Between a Fixed Interest Rate and an Adjustable Interest Rate?
There are two main types of mortgage interest rates:
- Fixed-rate: the interest rate you pay will stay the same throughout the duration of the loan, despite any fluctuations in the market. The parts of your monthly payments that go towards principal and interest will remain the same throughout the loan term though other fees like insurance and property costs may change over time.
- Adjustable-rate: The interest rate on a variable rate mortgage can change over time. You'll be provided with an introductory period of ten, seven, five, or three years (depending on the lender), during which the interest rate will hold steady. The interest rate may fluctuate after the set grace period is passed.
To Recap: Always Shop Around for Mortgage Rates
Shopping around for rare quotes from multiple lenders means you’re more likely to get a better interest rate and more favorable loan terms.
Many lenders provide free rate quotes after you've provided them with a few details such as your credit score, type of loan you're interested in, and loan amount. You can then use a mortgage calculator to determine which quote will reduce your monthly payments and save you money in the long term.
Compare the interest rates, fees, and closing costs required by each lender before making a decision.
FAQs About Mortgage Calculators
How can you lower your mortgage rate?
There are several ways you can lower your mortgage rate:
- Work on your credit scores. This way, your risk profile will reduce, and lenders will be more inclined to offer you better rates.
- Save up for a bigger down payment. The more you’re willing to invest upfront, the less risky you’ll be for the lender.
- Consider a shorter loan term. While your monthly payments will be markedly higher, you'll pay less throughout the loan since you'll enjoy lower interest rates.
- Apply with several lenders to ensure you get the best rate possible.
How long can you lock in your rate?
Now, this depends on the type of loan. With a fixed-rate mortgage, you lock in the interest rate for the loan duration, whether that's 15 or 30 years. For an adjustable mortgage, you can only lock in the rate for a specified period – ranging from one to ten years – depending on the loan terms.
Are mortgage rates negotiable after you get approved?
Mortgage rates are not negotiable after you get approved. A lock-in means that your interest rate will not change between the offer and closing.
However, you can always refinance your mortgage once you've built enough equity by trading in your current mortgage for a newer one with better terms.